Interest-Only Line of Credit or Variable Rate Mortgage - Which to Choose?

First of all, both products have one similarity. They both are set to the Prime lending rate. However, an interest-only line of credit (LOC) requires no principal payments, and you only pay the interest owing on the outstanding balance each month. The amortization is "infinity", and you will end up with the exact mortgage you started with at any future date, unless you pay extra in addition to the interest owing. For a line of credit, all banks normally charge their best clients the Prime rate, which today is 4.75%. For example, a $300,000 mortgage will cost you $14,250 of interest annually, or approx. $1,187.50 per month. An advantage of a line of credit is that you can always re-borrow whatever you have already paid down on your mortgage. The lenders refer to this type of mortgage as being re-advanceable. This is a great feature for those who have irregular income or are often purchasing and liquidating investments and require the ability to have access to funds when needed.

With a variable rate mortgage, the interest rate is also set to Prime, but at a lower rate, as the rate is usually set at Prime minus (for example, the rate could be set at Prime minus 0.50%). However, the major difference between a variable rate and a line of credit is that principal payments are required on a variable rate mortgage. For example, a $300,000 mortgage, amortized over 35 years at Prime minus 0.50%, will cost you $1,366.90 per month. Because a small portion of the monthly payment is put towards the mortgage itself, the mortgage balance after 5 years is $279,090.34,. This means your mortgage will have reduced $20,909.66 or an average of $348.49 per month (this is assuming that the Prime rate stays the same over the 5 year period; however, in reality, we will see changes over time, up and down).

The key difference is that you will be paying more for your interest-only line of credit (a half of one percent more!) which on a $300,000 is approx. $1,500 annually!

So which to choose? A re-advanceable interest-only line of credit at Prime, or a variable rate mortgage (with principal and interest payments) at Prime minus 0.50%?

My answer is both! But that's a discussion for another day, so stay tuned for more!

Now is a Great Time to Refinance!

There is no question that during the past several years, home values have increased. Depending on when you purchased your residence, the value of your home most likely appreciated substantially. Perhaps when you bought, you did not have an opportunity to add more to your mortgage because of your loan to value or debt servicing concerns, but these extra funds may have been useful for home improvements at that time. In today's market, it may be an excellent time to take advantage of your home equity to do those long awaited home improvements, or maybe consolidate all your other higher interest debt to just one convenient lower interest rate payment by considering a refinance of your existing mortgage.

Why is this a good time to consider refinancing? Lenders can now approve a mortgage up to 80% loan to value without requiring CMHC insurance (previously, the limit was 75%). If (and this is only an "if") home prices trend downwards in the future, the amount you will be able to borrow without needing CMHC insurance may be decreased. The longer you delay your refinance, there is a chance that you may have less equity in your home in the future, which may not make it possible to do a refinance on a non-insured basis.

Of course, we would first complete an analysis of your particular situation to determine if this is a good time for you to refinance. We would need to consider your individual circumstances such as, is your current mortgage locked-in? What is the penalty to get out of your existing mortgage? Is it better for you to wait until the end of your current mortgage term, or perhaps refinance with your existing lender? Whatever course of action you may take with your refinance, we are here to assist you!