Variable or Fixed

[cindyding]

Hi,

For new mortgage, I`m wondering, shall we take fixed rate at 3.75% or variable rate at P-0.2? There is a 1.7% difference, so even if the interest rate goes up 2% at the end of 2011, variable seems to be still better than fixed rate over the time. Any thoughts are welcome.

Thanks,

 

[RobMacdonald]

My personal opinion is that Variable rate mortgages are the way to go, but it depends on your personal circumstances. While increases are iminent, I don`t think we will see dractic increases in the short term.

You can do a better than Prime - .2% in this market. Depending on whether or not you`re buying a residence or a rental, there are some great specials available.

Send me a direct email if you`d like more information.

 

[invst4profit]

Historically variable is always less expensive in the long term regardless of where rates have gone.

If you have the risk tolerance I would take the variable and resist the urge to lock in regardless of what happens in the future.

 

[Thomas Beyer]

QUOTE (invst4profit @ Feb 17 2010, 06:28 PM) Historically variable is always less expensive in the long term regardless of where rates have gone.

If you have the risk tolerance I would take the variable and resist the urge to lock in regardless of what happens in the future.
indeed !

rather have some extra cash handy for ONE year of interest rate spikes or at least a LOC to draw on !!

best to not have a mortgage at all .. just a LOC up to 80% !

 

[jkcomm]

Excellent discussion!

My wife and I have a mortgage at P - 0.6... should be lock in?

James

 

[ltam68]

QUOTE (jkcomm @ Feb 18 2010, 12:42 PM) Excellent discussion!

My wife and I have a mortgage at P - 0.6... should be lock in?

James

Is this a new mortgage?

 

[jkcomm]

No... it`s about two years old. Unfortunately, P - 0.6 days are long gone!

James

 

[JimWhitelaw]

In Peter Kinch`s recent CTV interview, he mentioned that there is P - 0.3 available now, so not too far off of P - 0.6.

 

[RobMacdonald]

There`s actually rates at Prime - .4 available today. Only applies to residences, but it sure goes to show how far the pendulum has swung!

 

[mortgageman]

Depends on your risk profile but if it were me I wouldn`t be thrilled about giving my lender a 2 percent premium

QUOTE (jkcomm @ Feb 18 2010, 10:42 AM) Excellent discussion!

My wife and I have a mortgage at P - 0.6... should be lock in?

James

 

[AChrunik]

A 2% premium is just a short term outlook. Based on the fact that prime will rise and our fixed rates are the lowest that we will probably see for a long time...or we better hope...if not our economy is going into the toilet. Fixed rates are currently 3.89%-3.99% for most lenders so prime would need to hit only 4.25%. This is definitely very likely...expect prime to start to rise afte June/July. Statistically variable rates are the better way to go but this is the 1% fixed rates is a better option. Variable rates are a short term savings but as investors we have to look at the long term and bigger picture.

Central Bank Urged to hike rates

 

[Thomas Beyer]

QUOTE (AChrunik @ Feb 26 2010, 08:36 PM) ... we have to look at the long term and bigger picture. ...
looking at the long term variable rates are ALWAYS ALWAYS cheaper .. on average !!

Banks do not know either were rates will be in 2 or 4 years .. so they have to include a risk premium in fixed rates .. thus, ON AVERAGE, fixed rates are ALWAYS (!!!!) higher !

ditto with electricity or gas utility contracts !

 

[AChrunik]

QUOTE (ThomasBeyer @ Feb 26 2010, 11:02 PM) looking at the long term variable rates are ALWAYS ALWAYS cheaper .. on average !!

Banks do not know either were rates will be in 2 or 4 years .. so they have to include a risk premium in fixed rates .. thus, ON AVERAGE, fixed rates are ALWAYS (!!!!) higher !

ditto with electricity or gas utility contracts !

I would agree when we are talking about a time of normal rates or an economy that is in the middle of a normal cycle. We all know the fixed rates offered right now are the lowest that we will see for quite awhile. The low rates are due to the recession...since we are coming out of the recession rates will go up and we should have a strong run for at least 5yrs (cross fingers). Fixed rates were around 5 1/2% at the end of 2008...economists like Benjamin Tal predict 5-6% rates by the end of 2010. The bank rate will not stay at .25 (prime 2.25%). This is the 1% of the time when you cannot say with confidence that variable is better. This is also why lenders have added to their mortgage products 50/50 mortgages (1/2 in variable and 1/2 in fixed).

Fixed rates will always be higher at the time of getting the mortgage but if you lock in now at 3.79% you might give up some short term cash flow for maybe 6-9 months but that still means for the 4 years and 3 months you will be lower than the variable since rates will rise. When was the last time you saw prime rates as low as they are now? Shortly after September 11/2001 and we know what transpired then that prompted for the lower rates.

 

[invst4profit]

Statistics are what they are and the statistics show variable is on the average lower regardless of any present snap shot in time.
You appear to be approaching this topic from the perspective of one in the business of selling mortgages and from the perspective of having a low risk tolerance.
Variable is still the way to go in my opinion for investors now and always.
Homeowners on the other hand are not buying to make money and simply do not want to think about costs so they lock for 5 without giving the market a second thought.

 

[Thomas Beyer]

QUOTE (AChrunik @ Feb 27 2010, 09:02 AM) I would agree when we are talking about a time of normal rates or an economy that is in the middle of a normal cycle. We all know the fixed rates offered right now are the lowest that we will see for quite awhile. The low rates are due to the recession...since we are coming out of the recession rates will go up and we should have a strong run for at least 5yrs (cross fingers). Fixed rates were around 5 1/2% at the end of 2008...economists like Benjamin Tal predict 5-6% rates by the end of 2010. The bank rate will not stay at .25 (prime 2.25%). This is the 1% of the time when you cannot say with confidence that variable is better. This is also why lenders have added to their mortgage products 50/50 mortgages (1/2 in variable and 1/2 in fixed).

Fixed rates will always be higher at the time of getting the mortgage but if you lock in now at 3.79% you might give up some short term cash flow for maybe 6-9 months but that still means for the 4 years and 3 months you will be lower than the variable since rates will rise. When was the last time you saw prime rates as low as they are now? Shortly after September 11/2001 and we know what transpired then that prompted for the lower rates.
with respect .. I disagree ..

look at today`s (non-government set, market driven !!) 5 or even 10 year Canadian government or US bond rates .. quite low around 2.5% for 5 year and only 3.5% for 10 years .. thus it is UNLIKELY that fixed rate mortgages will rise a lot .. maybe 1% to 2% .. thus variable will continue to be cheaper ON AVERAGE !!

will prime be over 4% in 2 years .. possibly .. probably even .. but then money will be available at prime minus 1% to 1.25% probably as well again !

Of course a fixed rate at sub 4% today is a great rate for 5 years too .. and this "insured" or shall I say "assured" rate lets you sleep better at night even if it costs you some money over 5 years then it is the right thing to do !!

 

[MikeMcC874]

Is it not fair to assume that when banks set their 5 year fixed rate they expect that rate to cover the projected average bank rate, their costs, their expected profit AND a `fudge factor` over that period?

The first 3 items are built into variable rate mortgages by definition as they float with the bank and prime rates at a fixed offset. Seems they are actually less risky to the bank and would require a smaller fudge factor.

Canadian banks tend to not lose money and have a lot of people dedicated to just that. Although they are not clairvoyant.

I would also guess they have enough influence as to have that profitability figure into govenment monetary policy.

Using these (possibly naive) assumptions\assertions it seems to me that the variable rate will always beat out fixed barring a catastrophic event (like a 911).

Mike

 

[Thomas Beyer]

QUOTE (MikeMcC874 @ Feb 27 2010, 03:32 PM) Is it not fair to assume that when banks set their 5 year fixed rate they expect that rate to cover the projected average bank rate, their costs, their expected profit AND a `fudge factor` over that period?..

Banks use your cash (say in a chequing account that costs them 0) or they borrow money at around 2% locked in for 5 years or floating at 0.25% from the Bank of Canada and lend it to you with a 1.5% to 3.5% spread ... times a few billion $s in loans: quite a good business in ANY economy at ANY interest rate !

QUOTE (MikeMcC874 @ Feb 27 2010, 03:32 PM) .. Using these (possibly naive) assumptions\assertions it seems to me that the variable rate will always beat out fixed barring a catastrophic event (like a 911).

indeed .. but: 3.78% locked for 5 years is a great rate .. and a 5 year rate this time next year will likely be 1% to 1.25% higher (although a floating rate of P - 0.4% might still be below 3.75% )!!

 

[AChrunik]

QUOTE (invst4profit @ Feb 27 2010, 10:33 AM) Statistics are what they are and the statistics show variable is on the average lower regardless of any present snap shot in time. You appear to be approaching this topic from the perspective of one in the business of selling mortgages and from the perspective of having a low risk tolerance.
Variable is still the way to go in my opinion for investors now and always.
Homeowners on the other hand are not buying to make money and simply do not want to think about costs so they lock for 5 without giving the market a second thought.

I approach this topic as getting a mortgage today with the lowest fixed rates we will see and knowing that fixed and prime will rise quite dramatically in the next 6mths/9mths/1 yr and stick to that fixed is the best choice for today. I have a number of properties with the majority of them in variable as well...so I am not on the low risk tolerance. If I was to get that exact mortgage today on a 5yr term I would get a fixed at the 3.79% for a 5yr term. If it was 6mth-1yr from now I would probably go with the variable again. The difference is current rates and where they are going. I believe you are approaching this by a 10 yr or longer outlook...

Another factor for the fixed compared to the variable is that the fixed will increase your DCR in a lenders eyes compared to the variable. When calculating DCR with a variable you have to use the 3yr posted....which currently is 4.30. If DCR`s are low with exsiting portfolio and subject property it makes it harder for the next purchase, when in your name or company owned. Lenders used to use the 1.1 DCR rule which has been increased to 1.2 with a lot of lenders....every little bit helps. This might not be a decision factor for some of you but for others it can make the difference of getting another property or not!

 

[mortgageman]

Payout penalties are another reason for selecting variable over fixed rates.
I want to know my penalty will always be three months interest, not the greater of three months interest or the IRD. Yes, I realize with a sub 4 percent fixed it`s quite likely the penalty will be three months interest. However it`s not guaranteed.
QUOTE (AChrunik @ Feb 26 2010, 07:36 PM) A 2% premium is just a short term outlook. Based on the fact that prime will rise and our fixed rates are the lowest that we will probably see for a long time...or we better hope...if not our economy is going into the toilet. Fixed rates are currently 3.89%-3.99% for most lenders so prime would need to hit only 4.25%. This is definitely very likely...expect prime to start to rise afte June/July. Statistically variable rates are the better way to go but this is the 1% fixed rates is a better option. Variable rates are a short term savings but as investors we have to look at the long term and bigger picture.

Central Bank Urged to hike rates

 

[LillianHo]

I think if you choose variable rate, it will help your DCR for the next purchase? Because with the same amount of mortgage, you will pay less payment every month, so your debt is lower, and you can approve for more the next purchase. Let me know if I am wrong.

Also, one thing we need to keep in mind is that the bank prime rate is 2.25%, and bank of Canada overnight rate is only 0.25%. When the overnight rate goes up 2% to 2.25%, would prime rate goes up 2% to 4.25%? How about 3%, 4% more...I remember the bank prime rate usually only 0.5% higher than the overnight rate. Just a thought.