Wednesday, March 25, 2009

How Not to Borrow

The always outspoken Garth Turner recently posted a blog entry "How Not to Borrow". According to Garth, Canadians should choose a variable rate mortgage right now. The current variable rate mortgage is 3.30%, the five year fixed is 4.05%. It's not a huge spread, but a saving nonetheless.
I think the choice between a variable or fixed rate mortgage is an individual one. Yes, it has been proven that variable rate mortgages save you money over the long term. But, in the past, variable rate mortgages were always discounted off of the prime lending rate...today there are no more discounts. Borrowers pay prime plus 0.80% for a variable mortgage.
If you are a first time homebuyer with a minimal down payment or someone with a very tight budget, variable may not be the best choice. Yes, yes I know. You can always just call your lender and switch to a fixed rate at any time! The catch with a variable rate mortgage is that some legwork is required! You have to be committed to keeping an eye on the market and your mortgage so you can figure out the best time (if any) to switch over to a fixed mortgage. Many people don't have the time or gumption to do this. Variable rates move with prime and your mortgage payment changes right along with it. If you are someone who doesn't like surprises or has an air tight budget this may not be the way to go.
Read Garth's blog entry HERE.

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