This great article from Canadian Mortgage Trends certainly supports the new MERIX 3 year ARM at Prime-.25%.
Variable-Rate Mortgages: 3- or 5-Year?
November 16, 2009
We ve seen a noticeable increase in the number of people making variable-rate mortgage inquires.
Perhaps it s because the media keeps reiterating how the Bank of Canada won t be upping rates until at least Q3 of next year.
Whatever the case, the popular options for closed variable-rate mortgages have been:
• 3-year variables near 2.15%
• 5-year variables near 2.10%
Which is the better? The answer is not that obvious.
If variable-rate spreads remain the same, then whichever mortgage has the lower rate will entail the lowest cost (other things being equal).
However, if variable-rate spreads change in 3 years, it s a different story. (Note: we re talking about the spread from prime changing, not prime itself).
For example, suppose variable rates improve from today s prime 0.10% to prime 0.35% in three years. In that case, the 3-year variable comes out ahead even though its rate was initially higher. On a $200,000 mortgage amortized over 25-years, the 3-year variable strategy would be roughly $409 cheaper than the 5-year variable. (We re assuming prime remains constant for simplicity sake.)
Now the question becomes, is $409 worth the risk of not having your variable spread locked in for five years. What risk you say? Well, about a year ago, variable rates soared as high as prime 1.50%. That was thanks to the market s sudden aversion to mortgage lending.
While it s no longer probable, it is indeed possible that variable rates could once again rise above prime rate. If, for example, you assign a 1 in 4 chance of variable rates moving to prime 0.25% or higher in 3 years, then the expected value of the 3-year variable makes it more expensive then the 5-year.
In sum, if you re looking for a new variable-rate mortgage, you can boil it down to this.
Other things being equal:
o If you re planning to lock your variable into a fixed rate within 3 years, go with the lowest possible variable rate mortgage--as long as it has a 4.25% (or less) fixed conversion rate, as of today. [Mind you, if this is your plan, it s worth talking to a mortgage professional about fixed-rate and hybrid mortgage alternatives.]
o If you plan to let your variable rate ride, consider a 3-year as long as its rate is no worse than 0.10% above the 5-year. The popular wisdom is that variable rate spreads will be better in 12-36 months.
o Have your mortgage planner compare 1-year terms against the variable as well.