Variable or fixed rate of Mortgage?

[23994]

Hi,

Need some tips or advice regarding my upcoming mortgage refinance...

We had conversation with our bank yesterday and learned we can do refinance for our rental property now, the variable rate is 2.34% and fix rate is 2.39% for 5 year term, I am very attracted by the 5 year fixed rate now, but worry if we need to break the term and pay the penalty...

Please share your comments and advice as which one should be more fit to our rental property?

Thanks,

sue

 

[kfort]

What leads you to believe interest rates will rise?

With those #'s you're paying ~2% more to lock in. However probably significantly more if you sell within the term. What are the payout penalty comparison numbers?

Regardless, I'd go variable.

 

[Thomas Beyer]

Check out 2, 3 and 4 year fixed terms too.

2 or 3 years is often cheaper.

Payout penalties in either case are ??

 

[adriano]

I would go variable because I don't believe rates are going up . I think we will still see lower rates. Not much lower but lower .

 

[Thomas Beyer]

Indeed rates may go lower but will they go as low as Switzerland where a five year mortgage is only 1.06% and a 10 year mortgage is only 1.56% ?

Canadian banks act like clothing retailers, with a 400-500% markup from the central bank rate of 0.5% to 2.5-3.0% !

The Swiss view: https://www.credit-suisse.com/media/production/pb/docs/privatkunden/hypotheken/hypo-prognosen-en.pdf

As such I expect mortgage rates in Canada to not drop below 2% although they might in a prolonged low oil and recessionary environment ( which I believe is very unlikely ).

As such, assume rates to stay, more or less, where they are today for a long long time !

 

[23994]

Thanks all for your sharing and Thomas, always appreciated for your help!

Since this is early renew or refinance, the 1 and 2 years term are not applied unless we wait for the actual renew...

As for penalty, we are told for variable term, it is 3 month interest based on that time the Prime rate, for fixed term it is either 3 month interest based on that time the Prime rate or the difference between the 2.39% and that time the 5 year fixed rate, also depends on the pending mortgage amount and the pending term, which ever is the higher...so it is complicated and very uncertainty, but my gut feeling is the fixed term penalty will be more than variable rate, correct?

Thanks a lot!

Sue

 

[kfort]

Be clear on if penalty is based off your effective rate (with discount) or their posted rate. Often quite a difference. Most likely variable penalty is significantly less.

 

[23994]

for variable rate, it is 3 month interest of bank prime rate, for fixed term, I am not sure whether it is the discount rate or the posted rate, good question though...

and yes, I guess the variable penalty will be much less comparing with fixed term

 

[Thomas Beyer]

yes variable rate is less, often far less if you renew 3 years early on a 5 year term !

 

[RentGera]

I would almost always go variable, unless I know for sure rates are going up. Statistically, variable rates are much lower than fixed rates. See http://www.ratehub.ca/blog/files/2012/07/Mortgage-Rate-5-year-History-Graph-07.30-1024x697.png

 

[23994]

thanks everyone for your tips here!

 

[Yoon5203]

Great comments here. Sounds like almost always better off going with variable. What about if we have options like this? 2.05% 2 years fixed vs. 2.15% 5 years variable, which one better for rental properties under this market situation? Lets assume there could be a need for refi after 2 years. Thanks!

 

[Cory Sperle]

5 years is a long time. Many folks either refinace or sell before then, and almost always regret going fixed due to the astronomical penalties involved. I don't hear much regret for going variable.

 

[JROC]

Great comments here. Sounds like almost always better off going with variable. What about if we have options like this? 2.05% 2 years fixed vs. 2.15% 5 years variable, which one better for rental properties under this market situation? Lets assume there could be a need for refi after 2 years. Thanks!

Depends what your plan is with the property? If you want to refi after 2 years then go 2 year fixed.

 

[borisdavenport]

Hi I will always go with a fixed rate. If possible try to consult a mortgage broker as you are trying to refinance. Go with the best option you got, in this method you get the ability to bargain for lower interest rates if you have a fair credit score. I used this Mortgage Affordability Calculator. Hope this one will also help you.

http://www.canadamortgagedirect.com/tools-resources/calculators/mortgage-affordability-calculator/

 

[Thomas Beyer]

Hi I will always go with a fixed rate. ]

Why ?

 

[Thomas Beyer]

Depends what your plan is with the property? If you want to refi after 2 years then go 2 year fixed.

Exactly.

Keep in mind time and paperwork required for a refi, or a possible job change or different credit picture in 2 years. As such five years may be better if you have a long term hold in mind, but generally speaking two year rates are a bit cheaper than five year rates.

 

[Freerob]

I would go with variable as I don't believe that rates may go up anytime sooner. Still just compare the rates with 3 and 4 year fixed.

 

[Cory Sperle]

Again the rate difference is miniscule when compared to the discharge penalty cost. Don't trip over dollars to save pennies.