Variable or Fixed Rate Mortgage: Why Not Both?
I was talking with my dental hygienist the other day – or as well as anyone can have a discussion while having their teeth cleaned. She’s bought a condo and it’s time for her to move in and she can’t decide whether or not to take a variable or fixed rate mortgage. Every time I see her, we have the same discussion, but now it’s time for her to make a decision.
Here’s an idea: what if she did both?
The idea works around a concept called debt diversification. If you have at least 20 percent down payment on your property, you can split up your debt into both long- and short-terms and variable- and fixed-rates. There are many options and while banks offer it, they don’t actively promote the split-mortgage.
There are a couple of downsides to the split mortgage. While it does allow you take advantage of current rates and trends, it does turn your mortgage into a line of credit of sorts. Whereas the interest on a standard mortgage is calculated semi-annually, the interest on a split-mortgage is calculated monthly – adding up to five basis points.
A traditional mortgage is callable when it comes due, but like a line of credit, a split-mortgage is callable on demand by the bank. Also, a split-mortgage locks you into one bank over the duration of the mortgage. For example, if you have various chunks of your mortgage at three- and five-year terms (or longer), when it’s time to renew your three-year term you are stuck with that particular lender because the rest of your mortgage is held there.
According to the Canadian Association of Accredited Mortgage Professionals, only six per cent of Canadian mortgages are split. Perhaps it’s time for banks to start letting their clients know that it’s an option. There’s no reason why a savvy home buyers couldn’t go short and long, fixed and variable. Talk to your mortgage broker to see if a split mortgage is for you.
