Buyer Beware: Converting A Variable Rate May Cost More At A Bank

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Buyer Beware: Converting A Variable Rate May Cost More At A Bank

by: TheAverbachMortgagesTeam | Total views: 2 | Word Count: 765 | View PDF | Print View
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A variable rate mortgage loan is attractive to home buyers for a number reasons, not the least of which includes the significant savings over fixed rate mortgages. Depending upon the market, the difference between an initial rate on a variable rate mortgage and a fixed rate can range from 1 to 1.25 percent. That's a significant savings, whether you are a first time homebuyer or an investor.

It's a great idea to purchase a variable rate mortgage when you expect rates to decline in the future. When you do sign for a variable or adjustable rate mortgage, be sure there is an option to convert to fixed rate in a downward interest cycle. It is tricky to switch to a fixed rate mortgage just before interest rates start rising. How can you be sure you've timed your decision correctly? How will you know you are receiving the best financial advice? How can you be sure you are receiving the most competitive fixed rate loan? The answer to those questions: Call Averbach Mortgages.

Mike Averbach of Averbach Mortgages cautions, 'Converting your variable rate mortgage may cost more at a bank.' The initial rates offered at a bank or credit union may be very competitive. Later, when you decide to lock in to a fixed rate, you may find yourself at a disadvantage. As a consumer, acting on your own behalf, you probably won't be told by the big banks and credit union about all the options that are available.

There are things that the big 5 banks (TD, BMO, CIBC, Scotiabank, RBC) and credit unions might not be telling you. Contrary to what buyers believe, many banks have no obligation to give you the prime market rate. Many bank agreements do not state in the contract that you will receive the best rate available. Instead, at conversion, they only offer a 'posted' rate or a slight discount (maximum 1 percent) off the posted rate. Because of this, buyers get caught in a situation where they lose money by not being unable to fix their mortgage at the prime rate.

Let's examine a situation where a buyer has a $250,000 mortgage with a 25-year amortization. They have a five year variable rate mortgage and decide to lock in after one year. Converting to a fixed rate mortgage after one year at .25 percent higher than the best market rate equals $625 per year in additional interest costs. Over four years the buyer will pay an extra $2500 in interest. Over 25 years that amounts to $15,625. If you could save even a portion of that amount, isn't it worth at least a phone call to Averbach Mortgages?

When the client signs a mortgage agreement, the mortgage is already closed, and if borrowers decide to look elsewhere, they are charged a penalty by the bank for early payment of the loan. It's a win-win situation - but only for the banks. You, the customer, end up with a larger financial commitment than was necessary.

As an existing client, once you sign the agreement, the mortgage is already a done deal; you are essentially locked in. If you want to convert, the bank can offer you their posted rate - NOT necessarily their best rate. If you, the client, decide to seek financing elsewhere you will probably be charged a penalty. It's a win-win situation for the bank. You, however, are left paying more in the end.

How do you prevent paying too much? Make sure that your mortgage agreement has that crucial clause that states the 'Client will get the best available rate upon conversion to a fixed-rate mortgage.'

Many mortgage brokers work with lenders who are willing to make a commitment in writing to offer their clients the institution's best rate whenever clients choose to lock into a fixed rate mortgage. Even knowing this, some brokers still offer variable rate mortgages from the big banks purely because of brand recognition. That's why one of the most important decisions you make when financing your home is selecting the best mortgage broker. Averbach Mortgage Brokers fits that bill. We have your best interest in mind. Your needs and desires are our main concern.

Mike Averbach, Accredited Mortgage Professional at Averbach Mortgages, can be contacted via email at mike@averbachmortgages.com or by phone at 604-710-2550. Averbach Mortgages' Mortgage Manager, Justin Blacklock, can be reached via email: justin@averbachmortgages.com or at 604-707-6339. Justin, Mike and the entire Averbach Mortgages Team will explain the fine print in mortgage loan documents. They will help you chose a mortgage that truly reflects your situation and respects your best interest.
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