Variable or Fixed

[Bindy25]

Hello people just looking for some feedback on this. Purchase price $329,900 down pmt $32,910

1) Variable rate 5year term @ 2.2%. Payments are $1152.20


Other option


2) Fixed 5 year term @ 3.59%. Payments are 1373.36



What one do you recommend, these are both 30 year amortization. Should I go with variable and pay the fixed rate payment?


Thanks Bindy

 

[Thomas Beyer]

Variable is ALWAYS cheaper .. On average .. as banks do not know the future either and have to "insure" their rates by charging you a premium.



Go variable if you can afford a short term spike to 5% .. go fixed if you like to know exactly what he payments will be for 5 years.



In your case, your variable rate is 1.3% lower than fixed. If it stays this way for 2 years variable rates have to jump from 2.2% to 4.6% for the last 3 years for you to just break even in 5 years .. almost 2.4% or 100% vs. the current rate. Will they jump 2.4% to 4.6% .. possibly but not likely.



With a fixed rate you buy insurance.



Insure only what you cannot afford to lose. Hence, go for the highest deductible in car insurance and collision only, not comprehensive on a used car. Don't buy travel insurance if you can afford to lose the $1400 ticket to Europe.



So if you prefer to pay a huge premium for comfort .. do that. As an investor take the variable and leave a healthy cash reserve !

 

[bizaro86]

[quote user=ThomasBeyer]Variable is ALWAYS cheaper ..



Nope. Variable is not ALWAYS cheaper, it's most often cheaper. According to Peter Kinch, variable is cheaper 88% of the time.** By deduction, that implies that fixed is cheaper 12% of the time.



So while variable is a good default choice, there's no reason to say it's always cheaper, as all that does is prevent people from thinking about their options.



Thomas is of course right that banks insure their rates by charging a premium, so on average variable should come out ahead. But banks can't predict the future perfectly, so sometimes they fail to charge enough of a premium, if rates rise fast. That's the 12% of the time that fixed rate holders come out ahead.



Regards,



Michael



**Source: http://www.peterkinch.com/attachments/FloatOrLock%202011.pdf

 

[HeatherBrandt]

According to Peter Kinch, variable is cheaper 88% of the time.** By deduction, that implies that fixed is cheaper 12% of the time. Michael







I'd say by deduction if variable is cheaper 88 % of the time, then fixed is equal to or less than 12 % of the time.



I think we all agree that rates are going up, it's the individual risk vs. benefit that's hard to determine. If you pick the fixed rate, the worst you do is pay the (still awesome) rate for 5 years.



If you pick the variable rate, may win or lose on the amount of interest paid. The huge advantage in my mind (at least at Scotiabank) is that a 5 year variable mortgage does not have an interest differential equation that comes into play should you need to break the mortgage. It is always 3 months interest. So it your life goes sideways, you have a built in insurance policy.



We have several loans and they are a mix of LOCs, fixed, and variables. Hopefully in 3-5 years I'll know which was the best choice! I locked in 2 years ago for a 3 yr fixed at 3.45 % and thought it would never be lower. Last month I locked in for 2.99 %. Wrong again.

 

[bizaro86]

[quote user=HeatherBrandt]I'd say by deduction if variable is cheaper 88 % of the time, then fixed is equal to or less than 12 % of the time.





Fair enough. I'll further suggest that the number of mortgages where it would be exactly the same cost to go fixed or variable is extremely small. Thus, the fixed is cheaper than variable very nearly 12% of the time.



In any case, my point wasn't that anyone should necessarily take a fixed mortgage, moreso that it isn't always cheaper to go variable. Sometimes it is, sometimes it isn't. In the past it's been cheaper to go variable more often than not, and there are a number of reasons to reasonably expect that to continue in the future. But to say "Variable is always cheaper" stiffles free thinking about important options.



My loan base is also a mix of fixed, variable, and LOC. I don't regret the 3.69% 5 year fixed loans...

 

[wgraham]

Just early renewed over $1M in mortgages at a variable rate of Prime-0.85 with great terms! 6 months ago terms and rates weren't as attractive in the VRM so I went fixed. But yesterday I paid the small penalty to move back to VRM and saved myself a significant sum of money!!



VRM will stay low as interest rates are not going to spike up any time soon! See the following to pages:



Bank of Canada Statement



US Recovery Hobbled by Jobs and Housing

 

[JBagorio]

I too had an offer from Scotibank for a 3 year fixed at 2.99%. Since I don't see my self selling in the next 3 years...I am thinking of renew all my mortgages given that they are all coming due soon and refinance to take some money out to reinvest. What do you guys think of the idea? Given the rate. Please share your thoughts. Thanks!



Jason

 

[Hagen]

Jason



Rate is only part of the picture. The challenge is focusing on what seems to be a great financing rate, but forgetting/misinterpreting the bigger picture and finding yourself with mortgage terms that don't suit your future needs. As long as your decision is based on the whole picture, not just one aspect (i.e., best rate), then be comfortable knowing you're making the right decision for you.

 

[JBagorio]

[quote user=Hagen]Jason



Rate is only part of the picture. The challenge is focusing on what seems to be a great financing rate, but forgetting/misinterpreting the bigger picture and finding yourself with mortgage terms that don't suit your future needs. As long as your decision is based on the whole picture, not just one aspect (i.e., best rate), then be comfortable knowing you're making the right decision for you.






Thanks Harold,



Yes I am looking at it from that point of view! If I did renew all my current open variable mortgages that are coming due in the next 6 months at that given rate of 2.99% fixed closed. Based on my calculation I will be saving about 2 mortgage payments (about $60 to $100 per property) a month compare to what I am paying now. As part of my strategy is to take my equity out so I will have plenty of money to reinvest. May be step it up and get into the multi family commercial side of the real estate game!