The following is an article posted by one of our lenders recently, an interesting exercise. However with the recent plunge in the bond market yields there is pressure on the fixed rate market to lower rates, so it will be interesting to see how that develops.

We are certainly not suggesting that this is the right choice for all home buyers, as we deal with each client's needs and situation on an individual basis. We are always available to provide free professional advice to your clients.

"The Variable Mortgage continues to be a wise choice with fixed rates on the rise. Embrace the opportunity to educate your clients on the advantages of a variable rate mortgage. Why pay the lender for the security of a fixed payment when you can keep your money, pay less interest, and reduce your mortgage faster! Let's look at the difference of a variable at Prime -50 and a 5 Year fixed rate term for a $250,000 mortgage and we'll assume a 1% increase in Prime annually (who knows if we'll go that high or how fast but it gives a realistic picture of some possibilities) 

Well the numbers speak for themselves! With the Variable Mortgage you will:Pay $7,671.36 LESS in Monthly PaymentsPay $11,072.88 LESS in InterestBalance will be $3,403.43 LESS

Hybrid Mortgages Investors like to avoid putting all their eggs in one basket. But this philosophy has been slow to catch on in the mortgage market. 94% of people still choose either fixed or variable rates, says CAAMP. Very few choose a combination of both.That may be changing, if yesterday’s RBC/Ipsos Reid poll is right.According to RBC, 40% of prospective homebuyers (people who plan to buy in the next two years) intend to take out a hybrid mortgage. That compares to 32% in last year’s survey.

These stats are a little hard to grasp given CAAMP’s recent mortgage survey. It suggests only 6% of Canadians have actually chosen a hybrid mortgage in the last year. However, Ipsos Reid’s Sean Simpson, says: “I would account for the difference by saying that one is an outlook while the other is retrospective.”Simpson notes that, “Looking forward to the next two years, there is much more uncertainty in the direction of interest rates.” He says that Hybrids are therefore becoming more attractive since they let people capitalize on low rates while retaining an element of security.

Based on what an RBC spokesperson told us, hybrids may be catching on fast. In terms of the number of new buyers choosing hybrids, RBC says: "We have been trending similar to the survey results over the last quarter."Marcia Moffat, head of Home Equity Financing at RBC, adds: "As consumers begin to learn about the benefits of mortgage diversification, we're seeing more homebuyers gain a better comfort level with adding floating rate mortgage options."

From our own anecdotal observations, that appears to be the case. We’re not seeing anywhere close to 32-40% of borrowers choose hybrids, but there’s been a noticeable increase in hybrid mortgage inquiries compared to last year.The academic research supports hybrids as well. Dr. Moshe Mivelsky--Canada’s most quoted mortgage researcher—says: “Nobody can truly predict how rates will move over a five-year period. It’s just that simple.”He therefore believes hybrids are a good form of mortgage risk management. “People should strongly consider mortgages that are part fixed and part floating,” he told us last year. Interest rate diversification benefits borrowers just like it benefits investors who buy portfolios of stocks.

Of course, if history is a guide, well-qualified borrowers may save more money by simply choosing an ultra-low variable rate, or a 1-year fixed. But not all borrowers are in the same boat. Homeowners with only moderately strong personal “balance sheets,” can’t afford to dismiss the concept of risk management.  Many moderately-strong borrowers will in fact assume the risk of putting 100% of their mortgage in a variable rate.

There are several lenders who offer these hybrid mortgages, each product slightly different from the other.

Michael Hatch AMP
Mortgage Agent, Lic#M08008114
Integrity Financing – Dominion Lending Centres
Tel: 613.203.2030     Fax: 613.424.2111
Email: info@ottawashometeam.com
Web: www.ottawashometeam.com