Variable rate vs Fixed rate

[ekisielewski]

These are my options to finance my latest purchase and in spite of having chosen variable rate/25 yr amortization in the past I am wondering what I should do now. If I choose the variable rate mortgage with the 25 yr amort. my payment is approx $80 per month more ( it does not affect me much) and the principal reduction is $ 175 per month. If I choose the fixed rate ( 5.79%) with the 40 yr amort. The deal is slighlty positive cash flow but the principal reduction is only $ 60 dls per month.
Mortgage paydown is one of the profit sources so I am wondering if the extended amortization does make sense in this case?
What would you do?
Thank you
Elisabet - Oakville

 

[BMironov]

Hi Elisabet,

I think it all boils down to your goal. Do you want to pay down mortgage faster or have better cash flow. Or by other words: would you like to put money into bank`s pocket or keep for yourself. Think about "time value of money" as well. Cash in your hands can be used in many ways and will improve your chances of getting next mortgage. Principal paydown will be realized only when you will sell or refinance property.

My personal preference is to have longer amotization and lower interest.

Cheers,
Boris

 

[Peter]

QUOTE (BMironov @ Oct 19 2007, 10:30 AM) Hi Elisabet,

I think it all boils down to your goal. Do you want to pay down mortgage faster or have better cash flow. Or by other words: would you like to put money into bank`s pocket or keep for yourself. Think about "time value of money" as well. Cash in your hands can be used in many ways and will improve your chances of getting next mortgage. Principal paydown will be realized only when you will sell or refinance property.

My personal preference is to have longer amotization and lower interest.

Cheers,
Boris

Hi Elisabet,

There are many variables which should play into your decision. Building a rental portfolio is like playing a chess game - you or your broker should always be thinking 3 or 4 moves ahead. Try not to focus too much on rate though there are several lenders out there who offer both 40 year amoritizations and fully discounted variable rates - so despite the amoritization that you choose, you should be able to get the same rate or very close.

All real estate investors inevitably run into the same roadblocks, downpayment and TDS. Taking a 3000 ft view approach to your portfolio, making the right decisions now means still being able to get more financing in the future. By taking a 40 year amoritization, your monthly mortgage repayment is lower, which means that you would likely have a rental surplus on your portfolio that can be added back to income, and thus used to increse your income, and make it easier to qualify for mortgages in the future.

Its really a win win - you can choose to make your payments based on a 25 year amoritization if you wish by either increasing your payments, or making lump sum payments using your prepayment priviledges. Since from the banks perspective you are only obligated to make the lesser payments, should you need that rental surplus (calculated on the 40 year amoritization) to get the debt servicing in line to make future purchases, you have that option. Its kind of a built in protection, as you can always go back to the lower payment if you find your cashflow gets a little tight.

Choosing the product that affords you the most flexibility is the best way to go.

Thanks, Rebecca

 

[gambetti]

A slight twist to the question: Variable Vs. Fixed - which is best nowadays ?

In the past I have chosen to use variable rates over fixed rate mortgages as variable mortgages tended to provide lower rates. Even with increases in the variable rate, the additional money saved over the duration of the mortgage would still make it worth while.

The fixed and variable rates are now very close. It does not appear as if the Bank of Canada will raise interest rates in the short term.
Is the expectation that the rates will actually start dropping again - thus maintaining the variable rate as a better deal ?

I would love to hear ...
Thank you.

Claudio :O )

 

[BMironov]

QUOTE (gambetti @ Oct 23 2007, 05:33 PM) A slight twist to the question: Variable Vs. Fixed - which is best nowadays ?

In the past I have chosen to use variable rates over fixed rate mortgages as variable mortgages tended to provide lower rates. Even with increases in the variable rate, the additional money saved over the duration of the mortgage would still make it worth while.

The fixed and variable rates are now very close. It does not appear as if the Bank of Canada will raise interest rates in the short term.
Is the expectation that the rates will actually start dropping again - thus maintaining the variable rate as a better deal ?

I would love to hear ...
Thank you.

Claudio

)

Hi Claudio,

Of course, it is all right if you`re willing to pay extra for fixed rate. But be careful, becuase recently it was in the news that banks started to hike mortgage rates to pay for subprime meltdown. Just double check.

Cheers,
Boris

 

[PeterKinchMortgageTeam]

QUOTE (BMironov @ Oct 23 2007, 06:05 PM) Hi Claudio,

Of course, it is all right if you`re willing to pay extra for fixed rate. But be careful, becuase recently it was in the news that banks started to hike mortgage rates to pay for subprime meltdown. Just double check.

Cheers,
Boris

There really is no "right" answer to the variable vs fixed rate question as it depends on the individuals comfort level, and risk tolerance. The variable rate mortgage is actually a fairly new phenomen to mortgage financing, having been mainstream for only about 15 years. Historical data has indeed shown that the client in a variable rate mortgage has has signifigant interest savings over those that choose a fixed rate however, thats not to say that the future will echo the past...... Generally speaking, if you worry about interest rate fluctuations, and how an adjustment to prime will affect your cashflow, you are likely better off in a fixed rate. The spread right now between the fixed vs the variable is not large, so its really not costing much more to pay for safety. If you`re looking at a short term hold, and/or are comfortable with interest rate fluctuations, you would probably be better of in a variable.

Thanks,

Rebecca (for Peter Kinch)

 

[DonCampbell]

Hi Elisabet,
This is the latest research out of RBC Economics on interest rates.

Should help you with your decision as well:


Bank of Canada to hold rates steady; C$ strength to slow growth
 Canada’s economy continues to speed along and is on track to record another above-potential quarter for growth, although slowing U.S. demand, the strong currency and tighter credit conditions will take some of the wind out of the economy’s sails.
 The 15% appreciation in the Canadian dollar since March and slowing U.S. demand will likely see export growth moderate, which means that the drag from the trade sector will be more substantial in the second half of the year than the modest 0.6 percentage point weight in the first six months.
 The currency’s recent strength means that the Bank of Canada will shy away from boosting interest rates as the drag from the trade sector weighs on growth and does some of the Bank of Canada’s work of slowing the pace of economic growth back to the economy’s potential rate.
 While the combination of the strong currency and tighter credit conditions is likely to result in a slower pace of growth in the quarters ahead, the risk that domestic demand remains firm will prevent the Bank from lowering interest rates this year.
 Our assessment is that Canada’s weak patch will prove to be short-lived and that the economy will reaccelerate in mid-2008. We now expect Bank of Canada to hold the overnight rate at 4.5% until late next year when stronger growth in both Canada and the United States and a softer currency bring inflation concerns back into focus.
 The next move by the Bank of Canada is now expected to be a 25 basis-point rate increase in the fourth quarter of 2008. Our forecast for market interest rates has also been lowered with a 10-year rate of 4.35% at the end of 2007 and 5.05% at the end of 2008 from 4.7% and 5.55%, respectively.
Dawn Desjardins RBC Economics www.rbc.com/economics