Mortgage Rate Compression – What Should You Do?
Recently, mortgage rate compression has been significant between variable and fixed rates. While fixed rates have been trending downwards, variable rates have remained fairly steady and, as a result, many of the variable advantages have become diluted.
Should you go fixed or variable with mortgage rate compression?
Ultimately, it depends on your property goals, borrowing profile and risk tolerance. Specifically, in today’s market, an increased amount of clients are opting for fixed rates because there is little to no reward being offered for the risk assumed by selecting the variable alternative. Generally speaking, fixed rates are more attractive for borrowers at the present time.
What should you be aware of?
At Spin, we’re very pro-variable; however, we can’t ignore the current mortgage rate compression when advising clients. Therefore, when you’re deciding which fixed rate to go with, it’s imperative that you select a product that is portable, blend-able, and has standard discharge penalties based on a true calculation method. You need to know your exit strategy if/when your circumstances change at any given point during the term.
With a variable rate, it’s simple – you only ever pay 3 months interest to discharge a full feature mortgage, which is both predictable and nominal (not necessarily the case for a restricted product). With a fixed rate, the penalties can be exorbitantly high (see more on penalty differences). Blend-able ensures you can add money to the mortgage without being penalized, portable allows you to move the mortgage to a new property without a penalty, and a true penalty calculation prevents lenders from gauging you based on a contractual term you likely glazed over.
Yes, there’s a lot of mortgage rate compression. Yes, fixed rates look generally more attractive. Yes, you should evaluate all the options. If you go fixed and take advantage of these historically low rates during a time where mortgage rate compression is high, it’s crucial to be educated on the important product features so that, regardless of your life/mortgage decisions during the term, you’ll be protected.