Should I fix or should i stay Variable ??

[Knut]

I posted this in the power ring forum, but i thought i could get more exposure here.

http://www.canadianmortgagetrends.co...19-months.html

There are some estimates that the rates with increase 2.75% over the nexst 19 months.

So help me out here.

Currently I have a Prime- 0.75% Variable rate mortgage which expires in March of 2013. I can fix @ 4% before the weekend ends. What should I do ?

Predicting the future is tough here, but what is known is that regardless the banks will likely be increasing their fixed mortgage rates over the next year.

So... right now I pay 1.5%. IF i were to fix i would instantly have to pay an addtional 35% on my mortgage. However, if i fix in a year or two, i would likely be paying for a much larger increase.

Thoughts ??

[yads]

I'd stick with your prime -0.75% rate if I were you. That's a hell of a bargain.

[username]

Well at least if you fixed it now you would know what your payments will be for the next 3 years.

I'm in the camp that thinks inflation is going to start to pick up much quicker than most on this board so I also believe interest rates are going to ramp up quicker....so maybe I'm not the best guy to ask.

[blankall]

If you had a prime + I would definitely say fix, but with less than prime that's a tough call.

You aren't allowed to fix at any later date?

[MoneyGuy]

Paging Mike Oxlong....

[Russic]

i'm in this boat too (sub prime and freaking out). I'm getting a good deal of pressure to both lock in and stay variable.

[BagoPucks]

I am not a home owner but I think I can give you my thought. I think it really comes down to what sort of risk tolerance your finances can take. I am gonna give you an example - a rather raw example.
If you were in a high risk profession that sees you making more or less money depending on how the markets are doing ( so in a recession you make less money and in a boom you make more money) then I would suggest you go variable. If you are income is from a source where it is relatively safe (will have steady cash flow in a recession and a same or higher income in a boom) then i would suggest a fixed rate.
This is just a method of controlling your spending- So now we are recovering from a recession and things are prolly gonna get better than they were which means interests rates like u said can go up.

[Slava]

I have variable and am sticking with it. I might lock-in a part of it, but even that is unlikely. In your case rates have to go up to 6.25 (or so you pay that much, so 7%) and stay there for as long as they have where they are today, and that is the breakeven. (I hope this makes sense as it does to me, but I might be making this more convoluted here!). Anyways, that kind of increase is possible, but not necessarily likely.

[Deegee]

Current estimations have Prime rising to as high as 5.50% by the end of 2011.

If you can still get 4% right now it might not be that bad of a deal. Then again, if you can afford to make significantly larger payments over the next year and a half, then that might be your better option.

http://www.albertacentral.com/data/1...20Forecast.pdf

[Slava]

Originally Posted by Deegee

Current estimations have Prime rising to as high as 5.50% by the end of 2011.

If you can still get 4% right now it might not be that bad of a deal. Then again, if you can afford to make significantly larger payments over the next year and a half, then that might be your better option.

Not a shot at you, but how many of these estimates ever saw prime dropping as far as it has? I'm going out on a limb to say none.

[Knut]

I do not want to lock in at 4% and pay an additional 35% right off the bat. If there is a slow increase and then stabilization around 5% it would be better for me to hold out as a variable, becasuse even then I am paying 4.25%. My worry is if things rocket up in to the 7 to 10 percent range... because that is where things start to affect me financially.

[photon]

Originally Posted by Hesla

I posted this in the power ring forum, but i thought i could get more exposure here.

http://www.canadianmortgagetrends.co...19-months.html

There are some estimates that the rates with increase 2.75% over the nexst 19 months.

So help me out here.

Currently I have a Prime- 0.75% Variable rate mortgage which expires in March of 2013. I can fix @ 4% before the weekend ends. What should I do ?

Predicting the future is tough here, but what is known is that regardless the banks will likely be increasing their fixed mortgage rates over the next year.

So... right now I pay 1.5%. IF i were to fix i would instantly have to pay an addtional 35% on my mortgage. However, if i fix in a year or two, i would likely be paying for a much larger increase.

Thoughts ??

I'm in the exact same position for a couple of my rental properties. Currently at prime - 0.8%, 1.45% and have that for another 2 years, and the bank was offering 3.89% fixed 5 years.

So I sat down and made some spreadsheets and basically tried to figure out where interest rates would have to be in two years time to make it cheaper for me to switch now vs staying pat. And by cheaper I mean out of pocket amount spent.

After a lot of playing around I figured it was around 6%.

So if I think mortgage interest rates are going to be 6% or higher in two years it makes sense to switch, if not then stick. I also built in a .5% increase next year for the variable.

Of course in two years I can stay variable, 5 year fixed rates might be 6% in two years time, but will variable rates be that high? Prime would have to go up what, 3 or 4 points?

The other interesting thing is assuming 1.45, 1.95, 6, 6, 6 for the next 5 years, even though the payments would be the same, the amount going towards the principle goes down by 10%.

[Claeren]

You can mitigate a lot of your risk by paying down even more of your mortgage than you are now.

Just to make up numbers, if you are paying $1600/month now but would have to pay $3000/month at 7% try to start paying $3000 now (the numbers are more drastic going from <2% up to 7% I realize). That extra ALL goes toward the principle and then if rates do hit 7%:

1) You are used to paying that much/month
2) in a worst case interest rate environment, you can refinance the remaining amount back over 25 years (or 35) again, likely cutting the per month burden considerably
3) and if they never go that high you are very comfortably set in a few short years
4) any percentage lower you pay now is worth a lot more to you than any percentage extra will hurt you later, even more so if you accelerate your payments (you are better off with 2% now and 6% later than 4% all the way through)




I think the rate outlook is still very foggy. Things should have deflated big time but they didn't, how the tension in the markets plays out is anyones guess but I still think it will be worse for average Americans than having just dealt with the recent collapse would have been. The whole Tea Party movement, healthcare debate and the pending pension crisis (which Canada is not even remotely facing) along with the total debt and unemployment in the States is starting to seriously destablize thing ' on main street'. How long until that hits Wall Street?

For Canadians that makes it even trickier. A falling USD and climbing loonie keeps inflation artificially lower which means rates may stay 1%-2% lower than otherwise? That could be the spread that hurts you if you took the 4%-5 year.




Claeren.

[Knut]

Well I do not want to pay it down more than I have to as it is a rental property.

Talking to bank I can get a 2.99 % 3 year fixed rate on it. I think I may break it into 2 mortgages. Half at variable and half at the fixed rate of 2.99. That will mitigate some risk and keep my payments low in case the forecasts are wrong.

Thoughts ?

[photon]

2.99 for 3 years I probably wouldn't do, since rates would have to be super high after those 3 years to make it worth while.

EDIT: Just do up a spreadsheet and plug in all the #'s to see how the amounts change.

[Mike Oxlong]

It really comes down to what you are most comfortable with.
I understand you don't want you payments to increase by 35% overnight, however if you think inflation is going to cause rates to rise enough that you are paying more than 4% down the road it is something you are going to have to face eventually.

If it were me I would stay in a variable. Prime less .75% is a fantastic rate, better than anything available on the market today. The reason you get into a variable is to take advantage of rates when they drop. Right now they are at rock bottom and you are in a great situation. Yes they are going to climb and will likely start in a couple of months - likely June or July. However it isn't like they are going to jump 2% overnight.

With your situation you have a cushion of 2.5% before you are effectively paying 4% on your variable. I think the increase of 2.75% (from your article) is maybe a bit on the high side but it's tough to tell. I've seen other reports saying rates aren't going to rise as quickly as people think so it's a tough guessing game.

If you are finacially stable and can ride the fluctuations in the market then I would just hold on to the variable for now and keep milking that great rate as long as you can.

If you feel like an increase that effectively puts you over 4% is going to cause you trouble financially then maybe you should be locking in.

I really don't see rates climbing to the 7-10% range. Not anytime soon for sure, that is a MASSIVE jump. Even though we are living in some crazy economic times that just seems like too much of an increase. It would really cause a LOT of issues in the housing market and I thik the Bank of Canada is smart enough to avoid a problem like that.

I know this didn't really answer your question with a solid answer. It really is your choice and what you are comfortable with. If it was me I would stick with the variable and ride it out as long as I could (I would also take the savings every month and put it down on the principal as well). Since this is a rental property you may want some cost certainty as well which is another argument for the fixed.

I am starting to discuss the option of variable rates again with clients. Now that rates are at Prime -.5% variable rates are becoming an attractive option again. Within the next week or so most banks 5 year fixed will be in the 4.69% range. When 5 year fixed were 3.69%ish and the variable were at Prime or even Prime plus it was a no brainer to lock in to a fixed. With the recent rate increase on fixed and the fact you can get Prime less .5% makes variable a good option again. You effectively have a cushion of about 3% that rates need to climb until you are at today's fixed rates. (I know this is a bit different than your situation but just throwing it out there)

[Knut]

Thanks everyone. Going to run the numbers and decide. I will let you know what i pick.

[Sylvanfan]

Originally Posted by fotze

Just a bump. Clicked one of moneyguys links and learned some cool sh^t.

http://www.milliondollarjourney.com/...tgage-trap.htm

Damn I wish I read the long term vs short term mortgage part many years ago.

That "rates will go up like the 80's" bit is what always made me go fixed and long. But reading this is very interesting.

2. Rates may go very high like in the 1980s
I was an accountant for a mortgage company in 1982 when mortgage rates peaked at 22.75%. My first mortgage was a 5-year fixed in 1980 at 13.75%. I thought that I had lucked out, since rates jumped to 22.75% and were back to 13.75% by 1985 when it came due. What I didn’t realize was that, even then, I would have saved money by going variable! Based on Peter Draper’s study, I would have lost money for 2 years and saved money for 3 years. So, even with a huge leap of 9% in mortgage rates in the first 2 years of my mortgage, I still lost money with a 5-year fixed rate!

Back in my real estate owning days I always had variable rate mortgages. I even got them when rates were at "all time lows". For the 7 years that I owned a house, there was a grand total of maybe 10 months where my variable rate was equal to, or greater than what my best fixed rate would have been when I did my mortgage. I remember when it did spike up and the fixed crowd was like I'm so glad I fixed my rate now. Of course at times I was paying like 2% less than what the fixed rate was.

[Bill Bumface]

I'm so pissed at myself for going against my "No fixed mortgages" policy. The 3.6 looked so good/safe at a time when things were still pretty uncertain, but I already feel like a ######. The affordability of my house would be questionable at 8% on the same income, but we aren't going to see that happen.

[MoneyGuy]

Originally Posted by fotze

Just a bump. Clicked one of moneyguys links and learned some cool sh^t.

http://www.milliondollarjourney.com/...tgage-trap.htm

Damn I wish I read the long term vs short term mortgage part many years ago.

That "rates will go up like the 80's" bit is what always made me go fixed and long. But reading this is very interesting.

2. Rates may go very high like in the 1980s
I was an accountant for a mortgage company in 1982 when mortgage rates peaked at 22.75%. My first mortgage was a 5-year fixed in 1980 at 13.75%. I thought that I had lucked out, since rates jumped to 22.75% and were back to 13.75% by 1985 when it came due. What I didn’t realize was that, even then, I would have saved money by going variable! Based on Peter Draper’s study, I would have lost money for 2 years and saved money for 3 years. So, even with a huge leap of 9% in mortgage rates in the first 2 years of my mortgage, I still lost money with a 5-year fixed rate!

If you liked that last link, here is another. Moshe Milevsky of York University has done studies showing that you're better off about 89-90% of the time in a variable-rate mortgage. You almost always pay more for fixed-rate products.

http://www.canadianmortgagetrends.co...or-variab.html