Building The Case For Split Rate Mortgage
“Is It Time For Mortgage Lenders To Provide More Split Rate or
Dual Rate Mortgage Options?”
We have come to an interesting time in the residential mortgage market with respect to the direction of both variable and fixed interest rates.
With the discount on variable rates being reduced and fixed rates coming down, both based on the bond market and the lender’s profit margins on each of these products, the differential between variable and fixed (four year term) has gotten as low as 0.50%.
And even though the vast majority of Canadian mortgage holders are holding tight to variable mortgage rates, its once again time to ponder whether or not you should be switching to a fixed mortgage rate.
The additional one half a percent you would be paying would effectively serve as insurance against short term rates rising over the next four years, focusing the decision making process on risk tolerance than anything else.
And no matter how compelling the argument is to move to a fixed rate right now, the counter argument is that you are still paying more out in interest under the lower fixed rates, which is money you could keep in your pocket.
The banks have created quite a dilemma for themselves in that they have collectively moved the masses to variable rates that are now not making them any money.
And mortgage holders have gotten comfortable with the variable rate risk in that variable rates have created large cash savings over the last decade without any retribution from the financial markets, and the near to mid term outlook is for more of the same for the next couple of years.
Even though we have this half percentage point spread, its unlikely mortgage holders are all of a sudden going to move back or over to fixed rates, even though for many it could very well be the right decision from a risk protection point of view.
And with mortgage refinancing down 40%, mostly to the changes in the mortgage insurance rules, banks want to find a way to increase their profits in their mortgage portfolios.
So now what?
One way to get the marketing moving towards more of a win win solution, is to expand on the available split rate or dual rate mortgage program in the market where the borrower can choose a mortgage product that is a combination of a variable and fixed rate, enjoying the benefits that both offer at the same time.
While these programs exist in the market, there can always be ways to expand on the benefits they provide and promote them more aggressively to start moving people away from a strictly variable rate mind set.
This can potentially be good for both borrower and lender, and also move the market in general away from the large variable rate risk we hold as a country.
It will be interesting to see what the major lenders will be promoting in the months to come and what type of split rate mortgage offerings will be on the table.
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel