Lower prime rate resulting in better cashflow?

[llee]

Hi,

I have been hearing people saying that lower prime rate (assuming variable rate mortgage and locked-in period) will result in better property cashflow.

However, I thought that the payment for the mortgage would stay at same regardless of rate changes. In case of rate drops, more goes to the principal; if rate increases, the opposite applies (at least what my banker told me). How does it equate to more cashflow?

Thanks,
Lucas

 

[bigbabba]

QUOTE (llee @ Oct 21 2008, 10:32 AM) Hi,

I have been hearing people saying that lower prime rate (assuming variable rate mortgage and locked-in period) will result in better property cashflow.

However, I thought that the payment for the mortgage would stay at same regardless of rate changes. In case of rate drops, more goes to the principal; if rate increases, the opposite applies (at least what my banker told me). How does it equate to more cashflow?

Thanks,
Lucas

In a variable if the interest is reduced then so does your mortgage payment.

in a fixed if the interest is reduced then nothing happens because you are locked in.

 

[llee]

QUOTE (bigbabba @ Oct 21 2008, 11:39 AM) In a variable if the interest is reduced then so does your mortgage payment.

in a fixed if the interest is reduced then nothing happens because you are locked in.

Hmmm.. I have variable with TD. My banker told me my monthly mortgage payment will not change. Just that more money will go towards the principal. If the prime rate goes up, the mortgage payment will not change until a "triggering point" (high prime rate) that all payment goes towards the interest.

Or I change this payment option with the bank?

Thanks.

 

[seeu22]

QUOTE (llee @ Oct 21 2008, 11:53 AM) Hmmm.. I have variable with TD. My banker told me my monthly mortgage payment will not change. Just that more money will go towards the principal. If the prime rate goes up, the mortgage payment will not change until a "triggering point" (high prime rate) that all payment goes towards the interest.

Or I change this payment option with the bank?

Thanks.

There are two types of Variable rate mortgages. One where your monthly payment stays the same. As prime changes they just adjust the amount of principle paid down. The other way is where the payment changes from month to month to reflect prime.

I have heard of banks switching from one to the other at the customers request.

Neil

 

[Gerhardt]

QUOTE (llee @ Oct 21 2008, 11:53 AM) Hmmm.. I have variable with TD. My banker told me my monthly mortgage payment will not change. Just that more money will go towards the principal. If the prime rate goes up, the mortgage payment will not change until a "triggering point" (high prime rate) that all payment goes towards the interest.

Or I change this payment option with the bank?

Thanks.

Hi,
It depends on the lender. Most of the variables we have, the payments stays the same and the amount of principle paid off increases or decreases with interest rate adjustments. We do, however have one lender (Merix) that actually changes the payment with interest rate changes. TD, to my knowledge, is one that does not change the payments, however you should consult your banker to confirm that. Hope that is helpful!

 

[bigbabba]

learned something new, I had variable before and it fluctuated so i figured they all did. good to know.

 

[llee]

Thanks for all the good info.

 

[MonteDobson]

We have found that Scotia payments adjust as rates change, whereas RBC, TD and others, the payments stay the same = more principal paydown.

 

[TerryF]

Our TD variable rate mortgage payment changes and so does our FLF mortgage payment change. It all depends on which mortgage product you have!

QUOTE (C2Ventures @ Oct 21 2008, 02:10 PM) We have found that Scotia payments adjust as rates change, whereas RBC, TD and others, the payments stay the same = more principal paydown.

 

[RebeccaBryan]

You can just request to have your payment lowered. We`ve done that.

 

[GarthChapman]

You can also ask to have your amortization periods extended (or reduced). Many banks will do this with very little work. Scotia is just a phone call, TD requires a bit more info, and CIBC requires a complete new application and you must borrow an additional $10,000 at minimum.

We have extended most of ours - so cashflow is now much higher and we are recession-proofed.

 

[ToddStokowski]

Super comments everyone.

Todd

 

[PeterKinchMortgageTeam]

QUOTE (Gerhardt @ Oct 21 2008, 11:27 AM) Hi,
It depends on the lender. Most of the variables we have, the payments stays the same and the amount of principle paid off increases or decreases with interest rate adjustments. We do, however have one lender (Merix) that actually changes the payment with interest rate changes. TD, to my knowledge, is one that does not change the payments, however you should consult your banker to confirm that. Hope that is helpful!


That`s right. Totally lender dependant. Some lenders change payments, others do not. If the lending environment is fluctuating, and you know that prime rates are heading down, and lower payments would help your DCR or make the property breakeven - these are questions you need to be asking!!

When it comes to revenue property financing and building a portfolio, its not about rate. Its about the right products to help you meet your goals

 

[Nir]

Hey Everyone,

I find it interesting that when providing a variable rate mortgage, some banks automatically update the amount you pay (principal + interest) with any change in the interest while others will change it (extend amortization using CURRENT rate) ONLY upon your request and will NOT change the amount later even if prime goes up again.

In other words, some banks charge you (calculate principal + interest) based on the AVERAGE variable interest rate during your term (when looking back at the average payment for say 5 years) while others allow you to "freeze" the lowest interest in the term, calculate the monthly payment based on that and NOT change it the entire term! The last option is much better if you want to improve you cash flow and not in a rush to pay down your principal. In this case your payment is NOT based on the interest when you take the mortgage NOR the average interest but rather the LOWEST (best) interest you can capture in the term. BIG difference, again very interesting. I have a variable mortgage with RBC and did exactly that: a week ago after interest dropped to 3.4% (prime - 0.6) I locked it for the entire term(!) and I have more than 4 years left. It`s a significant reduction in the monthly payment that will NEVER increase unless I choose to increase it. (and I can and will "freeze" it again if prime goes down again)

Honestly, not sure if it is not the bank`s mistake (those who allow this) or at least not what they "meant" - to allow us to "freeze" the interest anytime. see the difference/advantage?

Always ask if this option exists – an advantage for cash flow improvement purposes. I improved my cash flow on a small property by $200/month by making one phone call last week!

Sounds like Garth did the same on a few.

Cheers,
Neil

 

[GarthChapman]

QUOTE (investmart @ Oct 26 2008, 04:49 PM) The last option is much better if you want to improve you cash flow and not in a rush to pay down your principal. In this case your payment is NOT based on the interest when you take the mortgage NOR the average interest but rather the LOWEST (best) interest you can capture in the term. BIG difference, again very interesting. I have a variable mortgage with RBC and did exactly that: a week ago after interest dropped to 3.4% (prime - 0.6) I locked it for the entire term(!) and I have more than 4 years left. It`s a significant reduction in the monthly payment that will NEVER increase unless I choose to increase it. (and I can and will "freeze" it again if prime goes down again)

Cheers,
Neil

Neil,

I think you will find that your mortgages have a clause that allows the Lender to increase the payment or to require a cash call at the point that the amount owing on the mortgage goes above a trigger amount, as would happen if you are in a negative ammortiztion scenario for long enough. That would happen if you locked the payment in and then interest rates increased.

All-in-all I tend to agree you should work to keep your payments low, with the caveat to not put yourself into a negative ammortization situation - you`d just be stealing from your future.

 

[Thomas Beyer]

QUOTE (llee @ Oct 21 2008, 11:32 AM) However, I thought that the payment for the mortgage would stay at same regardless of rate changes. In case of rate drops, more goes to the principal; if rate increases, the opposite applies (at least what my banker told me).
usually .. but you can ask to change monthly payment .. and some banks will say "OK" .. and some will say "I don`t think so .."

 

[Nir]

Hi Garth, good point. I guess the RBC employee who told me the payment does not change even if interest increases is not aware of that trigger you mentioned.

Regarding borrowing from the future - this is not a concern at all for me because by far my first priority is cash flow today. I`m OK stealing/borrowing from the future which by the way is what we are all doing when taking a mortgage for reasons obvious to you and me

Regards,
Neil