Today's low interest rates may be frustrating for investors in fixed income but if you're in debt--especially a homeowner -- it's an opportunity to save thousands of dollars.
Both variable and fixed-ratemortgages "look good right now," but Tridelta Financial Partners, a Toronto financial advisory, says variable rates present the greater opportunity for those comfortable with some risk.
Today's historically low rates are one fruit of the current troubled economy, but the question homeowners have to ask themselves is when the optimum time will be to pull the trigger and lock in on fixed rates. Tridelta says it makes sense to set up a variable rate mortgage as long as you can ensure you can later convert to fixed rates at the best available broker rate.
A typical bank variable rate (in Canada) is 3.25% (prime plus 1%), while Tridelta offersavariable rateat 2.85%. Compare that to fixed 10-year bank rates of 5.25% and five-year rates of 3.95%.
CONSOLIDATING DEBTS
An even bigger money-saving opportunity exists for those carrying significant credit card debt or car loans. Tridelta provides an illustration of someone with department store credit card debt incurring interest at 28.8%; a bank credit card charging interest of 19.5%, a car loan at 6.5%, an existing mortgage at 5.25%, and a line of credit at 4.5%, with total debt from all these sources of $192,000. Themonthly payments before consolidation amounted to a crushing $1,774amonth.
After consolidating with a new mortgage at 3.54%, the newmonthly payments are a much more affordable $963, a monthly savings on interest costs of $811.
REFINANCING YOUR MORTGAGE
Despite the penalties incurred to get out of an existing mortgage agreement, it may pay to pay those penalties, Tridelta says. Generally, you must pay the greater of three months interest or the interest rate differential between the existing mortgage and the newone you wish to replace it with.However, if you pay down the mortgage just before the penalty is calculated, you can save a bit. And if you're near the end of a mortgage term, the penalties may be less than if you've just started.
"Do not be put off by what looks like a big penalty, it is only one factor and locking in a historic low rate can still save you thousands,' Tridelta says, "These penalties can also be rolled into a new mortgage so that you don't have to 'come up with the cash' topay up front."
("Low interest rates opportunity to save your money" prepared by Johnathan Chevreau/Financial Post)
