Fixed vs. Variable Rate Mortgage

[LitigatorChick]

I''m in Canada, so it may be only my Canadian PSers that can help - not sure.

I am renegotiating my mortgage, and need to figure out if I should go with a fixed rate or a variable rate. My head hurts and I need PS advise.

For the sake of argument, here''s the numbers:

3 yr fixed - 3.6 (1.35 above bank prime)
5 yr fixed - 3.79 (1.54 above bank prime)
3 yr variable - 2.75 (.5 above bank prime)
5 yr variable - 2.15 (.1 below bank prime).

No doubt, prime has only one way to go in Canada. The BOC has promised to keep it where it is until the summer, but I figure it isn''t moving until 2011. But when it does, where will it go? If it only moves up 1.5%, I''m better off staying with a variable, enjoying a year or so of cheap rates, and then riding out rates at the same as the current offered fixed rate. But if it moves more than that, I''ll be wishing I locked in. No doubt, 3.79 is a nice rate, but I don''t want to throw money away if prime stays low.

Any words of advise????

 

[meresal]

LC- I'm sorry, but are you seriously asking this????

Here's the only question you need to ask yourself... can you afford your mortgage if it goes up to 5%? 10%? 15%?

ETA: What do you mean by "riding out rates at the current fixed rate"? Does your variable switch to fixed after a year?

Also, I noticed that you quoted where the rates were in comparison to "Prime" and how the BOC won't change "Prime". With an ARM the BANK can set the rate where ever they want, and unless it is in your contract somewhere that it will never go a certain amount above Prime, then the Prime rate is really of absolutely no matter to you.

 

[Bella_mezzo]

take the fixed unless you love risk and have a ton of extra cash sitting around.

 

[LitigatorChick]

Historically, variable is the best way to go. It is what I have always had. Other than the 80s, we haven''t seen interest rates of 10-15% in Canada. That''s just not a realistic concern.

When I say "riding out rates", I mean that I would take the variable rate, enjoy a year or so of a rate lower than the current offered fixed (3.79), and then assume that rates go up about 1.5 or 2.0%, meaning I would then have a rate for the next few years on a variable rate mortgage, but at a rate close to what I can get now on fixed.

I just need my darn crystal ball!!! The million dollar question is what is going to happen to prime in the next 3-5 years!! If any PSers have views on that, I''d love to hear them.

 

[meresal]

Most of the people on this board are from the US, and every single one of us will tell you that an ARM is a horrible option. Just look at our recent history and foreclosure rates. No one ever "saw" them coming, but it says right there in your documents that it can happen.

I would search for a forum that deals specifically with Canadian regulations. Like you said, that is what you have always had. Is there a reason you are doubting it now?

 

[MichelleCarmen]

No to the variable. Just get a fixed and know where you''ll be for the long-haul. ARMs can be deadly.

 

[dcgator]

Hey Litagator,

First, could you please clarify the loan options a bit. In the US, you can have an "ARM" mortgage, which means that rates will not budge until after a set period of time. Such as a 5/1 arm, in which the interest rate you get on the start date will not move for 5 years. Is that what we are discussing here?

If so, I think the better question to help you decide your mortgage is what your time frame is. If you are planning on occupying your residence (I assume that is what we are talking about) for only another year or two, than clearly you do not need to be as worried about what might happen in 5 years. However, if this a long term investment, than I would recommend going with a fixed rate.

However, that being said, you might want to contact someone is the financial services sector about what kind of financial position you are in and what you can afford.

Either way, good luck!

 

[upgrade]

I too am Canadian and I think the system is very different here! No 30 year mortgages at a set rate here! Variable rates are very common. I have a variable rate mortgage with an option to lock in at any time. It means we''re paying ridiculously low interest right now, but at any time if mortgage rates look like they''re going to rise, we can lock in to a 3 or 5 year term. Rates generally don''t just jump overnight- it''s a slow climb and there''s suggestion that it''s going to happen before it does, so it''s really not a huge gamble. We continue to make our payments as though we were locked in at 5 1/4 (that was our rate for our previous 5 year fixed) while we''re actually paying 2-something so what we''re doing is paying off our mortgage faster and saving ourselves a lot of interest.

I should add that we don''t have a traditional term mortgage. We have a Manulife 1 type of mortgage, but through our bank. It''s *not* a good idea for people without really good financial discipline, but if you''re disciplined it''s a very good option. As I said above, we make our payments as though we were locked in at a much higher rate and it has the potential to save us tens of thousands in interest. We did make very certain that we can lock in to a traditional 5 year fixed rate at any time should interest rates look like they''re going to rise significantly. It''s something that''s worth looking into. If you go to manulife''s web site you can get an idea of how it works and what your numbers would be, and then discuss it with your banker to see what''s available and what will work best for you.

 

[upgrade]

Date: 2/3/2010 1:07:35 PM
Author: dcgator
Hey Litagator,

First, could you please clarify the loan options a bit. In the US, you can have an ''ARM'' mortgage, which means that rates will not budge until after a set period of time. Such as a 5/1 arm, in which the interest rate you get on the start date will not move for 5 years. Is that what we are discussing here?

If so, I think the better question to help you decide your mortgage is what your time frame is. If you are planning on occupying your residence (I assume that is what we are talking about) for only another year or two, than clearly you do not need to be as worried about what might happen in 5 years. However, if this a long term investment, than I would recommend going with a fixed rate.

However, that being said, you might want to contact someone is the financial services sector about what kind of financial position you are in and what you can afford.

Either way, good luck!

No- different system. We traditionally renew our mortgage rates every 3-5 years with the mortgage ammortizing over 25 years. There are longer terms available but no one tends to use them because the rates are so much higher. It''s *always* a gamble to some extent because you just never know what rates are going to be in 5 years but anyone who is making a purchase has to take that into consideration- ie. ''I can afford my mortgage at 4 1/4%- can I still afford it at 6%?'' Banks are fairly conservative here with what they''ll lend too, keeping this in mind. As LC mentioned, other than a brief blip in the 80''s, we''ve never had skyrocketting interest rates here.

 

[drk]

I think it depends on your risk tolerance. DH and I just bought our first house. We went with ING for the mortgage for the flexibility in paying it off quickly (up to 25% lump sum per year, can increase your installments up to 25% each year without penalty). We decided we''d just like to pay our set amount and not worry about tracking interest rates or them climbing quickly when they finally start to go up. We''ve got a 5 year at 3.99% and are hoping to pay off our house within the 5 year time frame. We''re very debt- and risk-averse, and just want to plan based on one figure.
I know that variable have historically been better, but I''m not sure how much that applies when things are pretty much at rock bottom.
Good luck deciding - we certainly had trouble!

 

[LitigatorChick]

It appears the US situation is way different. As Upgradable mentioned, we renew our mortgages every 5 years at most, it can be less. Also, our variable rate mortgages generally allow us to lock into fixed at any time. So the risk of 10-15% rates during the term of this mortgage (ie. 5 years) is virtually nil.

Any other canucks with insight?

 

[October2008bride]

We went with a variable - DH is a financial planner so he keeps his eye on the rates every day. If they go up, we can decide to lock in. We figure that the money we save now will make up for it if the fixed is slightly higher than it is now when we decide to lock in.

With a variable, it isn''t like it will jump to 8% over night but like the fixed, we all have to renegotiate after 5 years. So that is the downside - in 5 years we all might get a bit of a rude awakening.

 

[LitigatorChick]

Thanks for your input October2008. I''m leaning that way as well. The lock-in feature is nice for the variable, and gives some flexibility to re-adjust.

 

[diamondseeker2006]

Things are totally different here. We locked in at 4.6% fixed for 15 years (US) and that is a dream of an interest rate to lock in for that long! Basically, your "fixed rate" mortgage choices are like our adjustable rate ones that are locked for 3-5 years. We are fortunate to be able to lock ours for 15-30 years.

 

[MichelleCarmen]

Date: 2/3/2010 2:38:18 PM
Author: october2008bride
We went with a variable - DH is a financial planner so he keeps his eye on the rates every day. If they go up, we can decide to lock in. We figure that the money we save now will make up for it if the fixed is slightly higher than it is now when we decide to lock in.

With a variable, it isn''t like it will jump to 8% over night but like the fixed, we all have to renegotiate after 5 years. So that is the downside - in 5 years we all might get a bit of a rude awakening.

October2008bride - are you in Canada? I''m just wondering because some of my friends here in the US have found that their houses are worth less than they owe. One friend of mine has a house that has an ARM and her house is worth $30K less than what they owe. Can that be re-financed in 2011 or 2012? Another friend by her did refinance so maybe things can be negotiated?

 

[October2008bride]

Date: 2/3/2010 5:38:40 PM
Author: MC

Date: 2/3/2010 2:38:18 PM

Author: october2008bride

We went with a variable - DH is a financial planner so he keeps his eye on the rates every day. If they go up, we can decide to lock in. We figure that the money we save now will make up for it if the fixed is slightly higher than it is now when we decide to lock in.


With a variable, it isn''t like it will jump to 8% over night but like the fixed, we all have to renegotiate after 5 years. So that is the downside - in 5 years we all might get a bit of a rude awakening.

October2008bride - are you in Canada? I''m just wondering because some of my friends here in the US have found that their houses are worth less than they owe. One friend of mine has a house that has an ARM and her house is worth $30K less than what they owe. Can that be re-financed in 2011 or 2012? Another friend by her did refinance so maybe things can be negotiated?

Yep - I''m in Canada. The potential that my house will be worth less than I owe in 5 years is definitely possible which is why we are trying to aggressively pay our mortgage down over these 5 years so that hopefully we''ll be okay. However, whether we had a fixed or a variable wouldn''t make a difference to that IMO.

I imagine refinancing a mortgage on a house that is worth less than what is owed would be crazy tough. Cross my fingers that doesn''t happen to us. We live in a pretty in demand area of a major city, so I hope that will keep us safe but I''m not naive enough to think that it isn''t possible.

 

[MichelleCarmen]

Date: 2/3/2010 6:43:39 PM
Author: october2008bride


Yep - I''m in Canada. The potential that my house will be worth less than I owe in 5 years is definitely possible which is why we are trying to aggressively pay our mortgage down over these 5 years so that hopefully we''ll be okay. However, whether we had a fixed or a variable wouldn''t make a difference to that IMO.

I imagine refinancing a mortgage on a house that is worth less than what is owed would be crazy tough. Cross my fingers that doesn''t happen to us. We live in a pretty in demand area of a major city, so I hope that will keep us safe but I''m not naive enough to think that it isn''t possible.

Hope everything works out for you. I''m not familiar with the housing market in Canada. Seems like it''d be better than here in the US. . .still the thought of being underwater is freaky. We''re renting and the house we''re in was up for sale before we moved in (and she couldn''t find a buyer so decided to rent) and now the value has dropped about $100K in the last few years!

 

[Jas12]

Litchick--i don''t think you can take any of the US examples into consideration. The banks function so differently, as the american collapse so obviously illustrated
. As you know, we have the soundest banking system in the world so that makes a huge difference IMO. We went with the variable on the house we''re building. The rate was just too good to pass up.
i''ve also been told that there is no ''right or wrong'' answer by ppl in the banking industry, just preference and risk analysis.

 

[October2008bride]

Date: 2/3/2010 7:21:17 PM
Author: MC

Date: 2/3/2010 6:43:39 PM

Author: october2008bride



Yep - I''m in Canada. The potential that my house will be worth less than I owe in 5 years is definitely possible which is why we are trying to aggressively pay our mortgage down over these 5 years so that hopefully we''ll be okay. However, whether we had a fixed or a variable wouldn''t make a difference to that IMO.


I imagine refinancing a mortgage on a house that is worth less than what is owed would be crazy tough. Cross my fingers that doesn''t happen to us. We live in a pretty in demand area of a major city, so I hope that will keep us safe but I''m not naive enough to think that it isn''t possible.

Hope everything works out for you. I''m not familiar with the housing market in Canada. Seems like it''d be better than here in the US. . .still the thought of being underwater is freaky. We''re renting and the house we''re in was up for sale before we moved in (and she couldn''t find a buyer so decided to rent) and now the value has dropped about $100K in the last few years!

Things here are still nuts with bidding wars and people spending sometimes hundreds of thousands over asking.

If you want a good reality check, LC, read www.greaterfool.ca

It is a blog by a Canadian economist who thinks everyone should either sell and rent or at a minimum lock in their mortgage rates.

 

[janinegirly]

Agree with the responses here. Variable is only good for short term--meaning if you are looking to flip the place AND think it's guaranteed to sell. Not a good gamble in current market. Certainly not a good idea if this is a property you will consider "home" (unless planning on paying off loan shortly).

ETA: talking from US perspective here..know nothing about Canada. And I'm assuming "safest banking system" means they are all government owned/subsidized. There are pros and cons to that of course.

 

[Hest88]

Fascinating! I had no idea Canada didn''t have the types of longer term 15/30 year mortgages we have in the U.S. Who knew I''d learn so many non-jewelry tidbits on PS?

 

[October2008bride]

I still think that in Canada the choice to go with a fixed is not as appealing as it is in the states because our fixed option is still only for 5 years. If the options were variable or fixed for 25/30, I''d probably make a different decision as well!!

 

[LitigatorChick]

Wow, the US is a totally different system. I knew there were differences, but I didn''t know that they were that substantial!!!!

The other nice things about the variable is I can lock into a fixed rate at any time. So another pro.

I don''t know!!!!!

 

[Haven]

It''s so interesting to see the difference between Canadian and US mortgages.

We''re in the US, and we took out a 30-year fixed mortgage at 4.75% when we bought our house. I think I quite prefer the Canadian system, though!

 

[upgrade]

Date: 2/4/2010 11:20:15 AM
Author: janinegirly
Agree with the responses here. Variable is only good for short term--meaning if you are looking to flip the place AND think it''s guaranteed to sell. Not a good gamble in current market. Certainly not a good idea if this is a property you will consider ''home'' (unless planning on paying off loan shortly).

ETA: talking from US perspective here..know nothing about Canada. And I''m assuming ''safest banking system'' means they are all government owned/subsidized. There are pros and cons to that of course.

The Canadian housing market is nothing like the current US market. There have been some areas here that have seen a slight decline, but for the most part it''s stayed very stable. I can really only speak for my own area because that''s what I know, but the housing market here is as strong as ever. Prices took a very, very slight drop when the US crash started (ie. a million dollar house may have dropped to $950 000ish) but are now back to where they were or in a lot of cases, higher. There are bidding wars happening all over the place and homes are moving quickly, as long as they''re priced correctly. While I''m sure there are instances where it has happened, because of the requirements here to obtain a mortgage we haven''t had the same situations where houses are now worth less than is owed.

I don''t believe the banks are gov''t owned, but as far as the mortgage crisis, since our mortgage system was so different to begin with we didn''t have the same problems. We had a crash in the 80''s and I think a lot was learned from that and it prevented the same mistakes from being made again. From what I understand of the US system vs the Canadian, the Canadian system is a lot more conservative.

It''s very interesting to learn the differences between the two countries. Canada and the US are so alike in so many ways but when it comes to things like mortgage systems and health care, we''re different worlds!

 

[Jas12]

Yes, upgrade, we are much more conservative and do indeed have the safest, most efficient banking system in the world and are the first country to bounce back from the collapse . This was widely reported over the last year. I think in fact many countries have just started modeling their lending systems after ours. I didn''t know much about our banking system until things started to go south, well, down south

Did you decide LC ? I hate making financial decisions so i feel your pain. You are in calgary too right? A very interesting real estate market!! It was insanely hot there a couple years ago. My parents sold a bungalow for a ridiculous price.

 

[October2008bride]

I don''t know everything about this, but while the Canadian system has not been hit like the states with all of the foreclosures etc, I don''t think our system is so secure as to guarantee it isn''t going to happen.

I think people like me who bought in the past year could be in for some huge trouble. With the super low interest rates and all of the media saying what a GREAT time it was to buy a house, first time buyers have been buying like crazy. Problem is most first time buyers only look at their monthly payments to see if they can carry the mortgage which is fine and dandy until rates go up. Even if you lock in now, in 5 years the rate could have doubled or worse.

That could be fine if you''ve paid down a good chunk of your mortgage but many first timers signed up for a 35 (or not so long ago, a 40 year) amortization with almost nothing down. So for the first five years they are paying almost entirely interest. What if our market does take a nosedive? Now your house is worth way less than you paid (keep in mind most sales in the major cities in the past 2 years at least have been in stupid bidding wars where people pay way more than the house is worth). So then you go to renegotiate, your house is underwater and you haven''t paid anything down hardly.

Sounds kind of like the US situation eh? (yes...generalization).

Anyways - all this to say is that we shouldn''t get too comfortable with our so called best system. We have our own version of the no money down mortgage and if the market here follows the states, some people could be in for a shock.

I''m sure there are exceptions and people who are smart about their purchases put a lot down and take a 25 year or less amortization but I bet you that the majority of the force behind our insane housing market this year is wide eyed first timers.

Crazy times, that is for sure.