to convert from variable to fixed-or not.

[RArora]

I currently have a variable rate for a 5 yr term on a rental property. prime-.5% so currently it is 2.5% that Im paying.

since the word is that rates will be going up-by how much in the next 3-4 yrs is debatable and everyone is unsure of, like many people we're considering if this is a good time for locking it in on a fixed rate.



thoughts from experts welcome.



Also, since it is a conversion, moving it to another bank will cost about $2k in fees, so we would have to take whatever it is that the bank offers. Firstline, our bank for this mortg, is offering a 3 yr fixed rate of 3.55% and 4 yr at 3.89%. (I wonder though how we can lock it for a 3 yr term when we've only started our 5 yr term from April 2010-but the person on the ph said that option is avail, I hope he's right)



what would be a good thing to do? convert or sit tight and go with the increases. it would take 4 increases of 25 basis points each for the rate to get to 3.5% for us, which I would think might happen in about 12 mnths. after that, im no expert.



Advise, suggestions welcome, esp from experienced sources like brokers and Thomas Beyer (your opinions many of us value no doubt.)



Thanks

 

[Thomas Beyer]

On average, a fixed rate is ALWAYS more expensive than a variable one.



Today a fixed rate on a 5 year mortgage is about 3.6% .. 1.1% higher than your variable. Prime will stay low for a while, but may rise 1% until year end 2011 .. or 1.5% maybe by end of 2012.



So if you switch to fixed today FOR SURE you pay 40% more !! (1.1%/2.5% = over 40%)



So, no one knows what rates will be in 3 or 4 years. However, if prime goes up, it is save to assume that long term bond rates go up too, and thus fixed rates.



So, the question is: are you willing to pay more today and the next year FOR SURE for a potential savings in 3 or 4 years ?



Ask yourself what prime rate you could afford on your property ! 4% ? 5% 6% ? 7% ?



My opinion is that there is a lot of cash around, the stock market is an iffy investment vehicle and therefore a lot of older folks in Europe or US or Canada will keep money in bonds. Interest rates will be LOW for quite some time. Hence, I stay variable on my condos and houses owned .. and keep enough cash at hand so I can survive a short term 1-2 year prime spike to 6 or 7% if it ever happens. However, I understand that some folks wish to lock in rates as they know for 4 or 5 years what the rate is and they sleep better at night.



Most of our commercial mortgages are 5 year fixed rates, and 2 are 10 years. 3 and 6 years ago I locked in 2 10 year mortgages because we thought then rates would go up (they are at 5.2 and 5.5% respectively). The rates have been lower ever since.



A fixed rate is insurance, and that is a personal choice ! Some have lots, some have some, and some have none. No right or wrong answer here.

 

[JoeRagona]

I can't really add more 'expert' advice than what Thomas has already written, but I can tell you how I deal with this same scenario with my own properties.



I ALWAYS stress test with the assumption the prime rate is going to go to AT LEAST 5%. I also reduce the amortization to 25 years (thank goodness I was doing that) and see how that goes. Most instances you will have a slightly negative cash flowing property, especially if you are investing in Barrie.



However, we always have cash on hand to cover the small dips in case we need to and take advantage of the larger principal pay down using the variable rate. As you said, it would take 4 increases of 25 basis points to get up to where the fixed rate basically is.



It's like I tell my partners, which one will you lose sleep over?



A lot of times the debate leans towards a fixed 'safe' rate, but then upon further review I hear a lot of "but we can get a rate 2% lower the other way and make more cash flow"....exactly.

 

[markl]

Your other option is to go in and get your variable rate lowered to -0.7 I know many investors who have had success doing this over the last several months.



This will give you a little extra cushion and allow you to pay more principal off on your mortgage.



Regards,

 

[RArora]

Thanks for your viewpoints and thoughts Thomas and Joey.



Markl-Im not sure they would do that when its a mortg already in place since april 2010. and for .2% i dont think I should move it elsewhere. DO you mean the bank would reduce it by .2% if I asked on my existing mortgage?



I was also wondering when you say that you keep available funds to take care of increases etc-do you mean funds avail to use by way of an LOC etc or by savings from your cash flow. For the latter I find I had to spend everything we did save from the cashflow on maintenance things (new roof, etc) last year.

 

[RArora]

But yes I do have both a HELOC and LOC with the full limits avail for use should I need to, in way of funds. Not sure if that is considered as having funds available to take care of such increases or maintenance etc.

 

[markl]

Hi Raj,



I am talking about just phoning up and asking your bank to give you the discount. It never hurts to ask. You might be surprised at the result.



I know .2% is small but on a bigger scale this provides a little more income to do with what you like. Instead of fixing pay the 5 yr fixed rate now and keep the variable therefore lowering your amortization.



Many investors I know have asked for this change and have received it.



Good luck.

 

[RArora]

Hey Mark



You're right. no harm in asking.

will try that too. Any saving is a saving



Thanks!

Rasna

 

[flyingsquirrel]

I am interested in knowing why especially Barrie. Isnt Barrie a good place to invest in?