Kiyoko Fujimura
Buzzbuzzhome Corp.
March 3, 2010

Many mortgage holders strain endlessly about whether or not to lock-in at a higher rate or allow the rate to vary and put themselves at the whim of the bank’s interest rates (something like, say, prime plus 1%…if you’re lucky!).

BUT, John Turner, director of mortgages at BMO, allows mortgages to be SPLIT so you can diversify your interest rate risk. That way you can lock-in a portion of your principal to a fixed rate, while still benefiting from lower rates (if they happen to become lower).

“You can have short-term variable, some long-term. You could also ladder your debt [so a certain percentage becomes due every year.]” The Financial Post

Obviously the banks do charge a fee for this (have you ever heard of a bank NOT charging for something that reduces your risk exposure?). Sometimes it can be up to 5 basis points (a basis point is 1/100 of a percent).

Banks do, however, attempt to make these mortgages like any other. Your statement will arrive with one payment shown.

So what are the drawbacks? The variable rate option implies a line-of-credit arrangement which is technically callable by the bank at any time. In addition, it may tie you down to one bank if you have differing maturity dates. So ensure that when negotiating your mortgage at the beginning, you insist on incorporating some provisions to renegotiate rates.

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