rates... go long fixed or short variable?

[timewithkids]

I have been reading the forum topics for a few months now but wanted to get some feedback as to what the consensus would be regarding interest rates. I am close to closing on a triplex that is very close to home. I am currently using the Manulife One HELOC as the "mortgage" on my principal residence, and will be using about $50 000 from that as the downpayment. I chose this a few years ago after reading about the "Smith Maneuver" and am slowly changing my bad house debt into tax deductable good debt in the form of a business loan. I am ok with the variable rate on our house,but am wondering which way to go for the income property. Rates seem to be near historic lows and now that the Bank of Canada did not lower rates any further I am thinking it may be a good time to lock in for a 5-10 year term and not have to worry about fluctuating rates as well as increasing heating costs.
I know the monthly payment is about $200 more but I am contemplating the price of security??
Thanks for any input that you can give, Brian

 

[EdRenkema]

QUOTE (timewithkids @ Jun 27 2008, 09:14 AM) I have been reading the forum topics for a few months now but wanted to get some feedback as to what the consensus would be regarding interest rates. I am close to closing on a triplex that is very close to home. I am currently using the Manulife One HELOC as the "mortgage" on my principal residence, and will be using about $50 000 from that as the downpayment. I chose this a few years ago after reading about the "Smith Maneuver" and am slowly changing my bad house debt into tax deductable good debt in the form of a business loan. I am ok with the variable rate on our house,but am wondering which way to go for the income property. Rates seem to be near historic lows and now that the Bank of Canada did not lower rates any further I am thinking it may be a good time to lock in for a 5-10 year term and not have to worry about fluctuating rates as well as increasing heating costs.
I know the monthly payment is about $200 more but I am contemplating the price of security??
Thanks for any input that you can give, Brian

I`ve contemplated the same thing but there are several ways to look at it. First variable rates are always the lowest and over a given time period you will always have the best rate going if you stay with variable. Second as Don pointed out at last night`s REIN workshop if rates on a 5 yr closed are several points higher why go there now, instead just stay with variable and you`ll get there anyway if rates rise as they likely will, point is you are only rushing to the higher rate if you lock in now. If however the thought of higher rates keeps you up at night, best to lock in so you can get better rest.
Also what happened after BOC decided not to lower rates as expected last time? The longer term rates went up not the variable. I`m staying with variable across the board.

 

[Thomas Beyer]

a fixed rate is ALWAYS ALWAYS more expensive as it includes "insurance" by the bank ! The bank doesn`t know either where rates will be in 2 or 4 years .. so they must add a risk premium to cover this possibility.

There was a chart posted by one of the REIN members here in this forum to show this variable rate vs. fixed rate .. and over 20 years it always has been lower ON AVERAGE ..

Example: right now variable is prime - 0.75% or 4.00% .. fixed is about 5.5% for 5 years .. so 1.5% or 25% difference in cost added as "insurance" ! Your call if this is worth the risk (of a spike) to you !

 

[timk519]

I agree on the variable being lower than a fixed rate mortgage. My question would be - what is the highest rate one could expect to see from the BOC going forward based on the fundamentals? Put another way, how much "cushion" should one plan in their property purchase / rental in order to make sure it`s cash flow stays in the black - particularly in Ontario where it`s harder to pass on cost increases like that?

 

[Thomas Beyer]

QUOTE (timk519 @ Jun 28 2008, 08:22 AM) I agree on the variable being lower than a fixed rate mortgage. My question would be - what is the highest rate one could expect to see from the BOC going forward based on the fundamentals? Put another way, how much "cushion" should one plan in their property purchase / rental in order to make sure it`s cash flow stays in the black - particularly in Ontario where it`s harder to pass on cost increases like that?

if you or I knew that .. we`d be geniuses .. sought out by central bank`s and economists the world over .. and would sit on our own private beach !

I`d say prime going up 2 or 3 or 5% points would be "in the range" of a possible spike .. but could be only 1 or 2% points ! NO ONE KNOWS EXACTLY !! too many variables: Obama vs. Cain, nuclear atatck on Iran,Chinese or US trade war with various states, inflationary pressures in various countries, more bank crises, US dollar decline, price of gold, price of oil, government deficits, NDP + liberals destroying the Canadian economy with a green label ...

another option is a line-of-credit (LOC) or also called home equity LOC (or HELOC) .. usually variable at prime or prime -0.25% .. read more here: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2302-What_is_better_a_mortgage_or_a_line-of-credit_.html

 

[timk519]

QUOTE (thomasbeyer2000 @ Jun 28 2008, 12:44 PM) if you or I knew that .. we`d be geniuses .. sought out by central bank`s and economists the world over .. and would sit on our own private beach ! Hey, I`m all for that!

QUOTE (thomasbeyer2000 @ Jun 28 2008, 12:44 PM) another option is a line-of-credit (LOC) or also called home equity LOC (or HELOC) .. usually variable at prime or prime -0.25% .. read more here: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2302-What_is_better_a_mortgage_or_a_line-of-credit_.html I`ve got one of those - loved being able to put all my earnings against the mortgage and get rid of it sooner instead of later.

What I`m basically getting from your response is that the best way to "plan" for an interest rate spike is to have a decent sized cash reserve "just in case."

 

[Thomas Beyer]

QUOTE (timk519 @ Jun 29 2008, 12:18 PM) What I`m basically getting from your response is that the best way to "plan" for an interest rate spike is to have a decent sized cash reserve "just in case."

yes .. go variable .. but have a reserve .. and save in the long term !!

 

[timk519]

QUOTE (thomasbeyer2000 @ Jun 29 2008, 11:46 PM) yes .. go variable .. but have a reserve .. and save in the long term !! How big of a reserve would you recommend?

 

[Thomas Beyer]

QUOTE (timk519 @ Jul 1 2008, 05:36 PM) How big of a reserve would you recommend?

hard to say exactly .. let`s assume break even or slight positive cash-flow @ 5% mortgage .. at the very least 3 months mortgage payments .. better 6 so you can sleep at night if there is a vacancy or the boiler breaks down .. or ability to hold through 2 years of 8% prime rate interest rates !

 

[timk519]

QUOTE (thomasbeyer2000 @ Jul 1 2008, 08:06 PM) hard to say exactly .. let`s assume break even or slight positive cash-flow @ 5% mortgage .. at the very least 3 months mortgage payments .. better 6 so you can sleep at night if there is a vacancy or the boiler breaks down .. or ability to hold through 2 years of 8% prime rate interest rates ! 8%? Yikes!

A worst-case scenario would be to go back to the double-digit rates back in yesteryear..

 

[Thomas Beyer]

QUOTE (timk519 @ Jul 3 2008, 07:57 PM) 8%? Yikes!

A worst-case scenario would be to go back to the double-digit rates back in yesteryear..

yes .. in theory .. but then we have huge inflation and huge rental increases too !

 

[timk519]

QUOTE (thomasbeyer2000 @ Jul 3 2008, 11:36 PM) yes .. in theory .. but then we have huge inflation and huge rental increases too ! I was under the impression Ontario`s policy limited how much one could increase rent - which could put a landlord in a world of hurt in a transition from a low to high interest rate / inflationary regime. Am I mistaken?

 

[willy]

The rate increase in Ontario is set by the government annually and is based on the inflation rate, so if inflation takes off, then you can raise your rents accordingly.

 

[Thomas Beyer]

QUOTE (willy @ Jul 6 2008, 01:42 PM)
The rate increase in Ontario is set by the government annually and is based on the inflation rate, so if inflation takes off, then you can raise your rents accordingly.


yes, but keep in mind that we have TWO inflation rates: the one published by the government, called CPI or core inflation, and the real inflation .. which is MUCH higher ..



the best way to get rents up is to improve the suites on turnover ..

 

[terri]

QUOTE the best way to get rents up is to improve the suites on turnover ..

It`s kind of ironic and sad that in Ontario you could potentially profit more if you have tenant turnover every couple of years than if you have great tenants that stay forever.

 

[timewithkids]

THANKS TO EVERYONE FOR YOUR INPUT. I THINK THAT I AM GOING TO WITH A LOC TYPE PRODUCT AT PRIME AND START RIGHT AWAY ON BUILDING UP A RESERVE FUND.

I HAVE ANOTHER QUESTION THOUGH, THE BANK REP THAT I AM DEALING WITH SAID THAT THERE IS A 3% CMHC FEE EVEN IF THERE IS A 20% DOWNPAYMENT. I WAS UNDER THE IMPRESSION THAT THERE WERE ONLY CMHC FEES IF YOU WERE PUTTING DOWN LESS THAN 20%.... OR IS THIS BECAUSE IT IS A RENTAL?
THANKS AGAIN FOR YOUR TIME, BRIAN

 

[Thomas Beyer]

QUOTE (timewithkids @ Jul 12 2008, 12:21 PM)

THANKS TO EVERYONE FOR YOUR INPUT. I THINK THAT I AM GOING TO WITH A LOC TYPE PRODUCT AT PRIME AND START RIGHT AWAY ON BUILDING UP A RESERVE FUND.

I HAVE ANOTHER QUESTION THOUGH, THE BANK REP THAT I AM DEALING WITH SAID THAT THERE IS A 3% CMHC FEE EVEN IF THERE IS A 20% DOWNPAYMENT. I WAS UNDER THE IMPRESSION THAT THERE WERE ONLY CMHC FEES IF YOU WERE PUTTING DOWN LESS THAN 20%.... OR IS THIS BECAUSE IT IS A RENTAL?

THANKS AGAIN FOR YOUR TIME, BRIAN


CMHC is an insurance company. It insures the bank from you defaulting on a loan, thus reducing the bank's risk to 0. CMHC hence alwasy has a fee .. even at 50% LTV .. so the question is: why CMHC in the first place ? It is not required for a loan of up to 80% LTV on a residential mortgage ! Usually you use CMHC only for high ratio or for a rental property for multiple units to lower the rate !

 

[gwasser]

For my 2cnts worth. Overall, variable rate mortgages are cheaper than 5 year terms as others already told you. So make a worst case estimate that if interest rates would rise because of a sudden spike in inflation - say 2% two years from now. Based on that scenario you can calculate what your worst case price difference is between locking in for 5 years and a variable rate. In fact you could make several scenarios, including falling interest rates. That way you know what may happen, because nobody can forecast what will actually happen.

If the difference in interest payment (i.e. your risk) is significant to you, then get some protection by considering splitting up your financing in part variable rate and part 5 year. Since you used your Heloc to finance your `down payment` why not increase your `down payment` and put the rest in a fixed 1st mortgage?

Just some ideas.