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Fixed vs. Variable

Here is a question from one of my readers.

"Tibor, what would you advise someone buying a first home today about mortgages – lock in for five or 10 years, or go variable?" Most people are going fixed, though a lot are also using combination mortgages, according to info from RBC.

Although I knew the answer I consulted with one of my lenders and here is what he had to say...

A ten year mortgage has very reasonable prepayment penalties ONCE you get into the sixth year and beyond – then it’s just three months’ interest.

But IRD (Interest Rate differential) in years one to five of a ten year mortgage is serious Money – so as much as the rate protection is attractive, it is unlikely the ten year mortgage will fit a first time home buyers needs over such a long period of time. The ten year mortgage is a better fit for a clients who know that they won’t be moving anywhere in some time, like me. I have been in my house for 10 years and I don’t see myself living anywhere else.

(a) Fixed or Variable – no discussion necessary – go fixed.

(b) What term? - Yes five years is often the term of choice, but it
may not be the best if you are pretty sure you will move in three
years. You can do 2.99% for three years and 3.19% on very clean
applications for five years.

Feel free to comment or contact me with any questions/inquiries.

Kind Regards,

Tibor Bogdan

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