# What would you do? Mortgage question



## cman2 (Jan 14, 2011)

Here's the scenario. $80,000 left on mortgage which is up for renewal shortly (house valued at $330,000). Will be paid off in 6 years or less.

Option 1: 5 year variable (Prime - 0.60). Currently 2.4 %
Option 2: 3 year fixed 2.74 %
Option 3: 5 year fixed 2.94 %

All have pre-payments options.

Generally, I'm not too risk averse and could handle an increase in payments if rates went up.

With all this in mind, if you were me, which option would you go with?


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## Spudd (Oct 11, 2011)

I'd take option 1 with option 2 as my 2nd choice.


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## protomok (Jul 9, 2012)

Have you tried Investors Group?

They were offering a < 2% variable rate back in May (http://business.financialpost.com/2014/05/13/investors-group-mortgage-rate-canada/), not sure if it's still available if you give them a call.

Also their 3 year fixed rate is pretty competitive @2.59%.

You could also just call whichever company you are planning to use and get them to match Investors Group


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## Just a Guy (Mar 27, 2012)

It all depends on you, and your ability to predict the future.

If the rates don't increase more than .55% for half the term of 5 years, variable will be the best option. 

If you want to know what your payments will be every month 5 years will probably be the best. 

If you think the rates will be higher than .5% in three years, option 2 would be more expensive.

Since you are only talking 6 years in total, I would think there are better things to worry about. 5 year closed is the most popular option because of psychology, not from a financial point of view...the banks know this and that's why they target that one.


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## birdman (Feb 12, 2013)

See if they will let you divide it into 2 or 3 separate "buckets", eg some in each of variable, 3 yr, and 5 yr.


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## KaeJS (Sep 28, 2010)

Option 1.


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## wendi1 (Oct 2, 2013)

How long are you planning on staying there? Which options allow you to cheaply end the mortgage if you have to? I used ING Direct (now Tangerine) and was very happy indeed.

Myself, I dislike prime+- rates, and am willing to pay a little extra for consistency.


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## jserrg (Apr 17, 2013)

When I went on my first term - my mortgage broker talked me into a fixed term using the same psychology-mythology technique. Before accepting my second term I calculated how much I overpaid during my first 5 year term - and the answer became clear - I only choose variable since then. 
Why pay more?


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## Clacker (Mar 18, 2012)

Don't most variables still come with the option to lock in at any time? In this case it looks like Variable will win hands-down.


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## My Own Advisor (Sep 24, 2012)

Option # 1 if you can lock-in anytime.

I need to re-negotiate our mortgage.

Thinking of going 3-year or 5-year variable myself, with $200k left, at current payment and lump-sum payment rate, will be done in 8 years.


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## RBull (Jan 20, 2013)

My Own Advisor said:


> Option # 1 if you can lock-in anytime.
> 
> I need to re-negotiate our mortgage.
> 
> Thinking of going 3-year or 5-year variable myself, with $200k left, at current payment and lump-sum payment rate, *will be done in 8 years*.


Nice. Keep it up.

Yeah, variable doesn't seem like big risk if you're prepared. Savings on the rate end probably worth it unless you need peace of mind.


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## My Own Advisor (Sep 24, 2012)

Trying RBull 

I think if we have a decent emerg. fund built up and can stomach higher rates (as in double they are now), I'm thinking 3-year variable is the way to go for us. Hopefully at time of renewal, we'll be just under $200k to borrow.

Scotiabank has a 3-year variable for 2.6% now with 15/15 pre-payment privileges.
http://rates.ca/best-mortgage-rates/3-year/variable-closed


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## HaroldCrump (Jun 10, 2009)

My Own Advisor said:


> Scotiabank has a 3-year variable for 2.6% now with 15/15 pre-payment privileges.


That does not sound like a good rate, given that 4 and 5 year fixed aren't that much higher.
I recently renewed for 4 years at 2.89% fixed.
29 bps isn't worth the risk of going variable.


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## My Own Advisor (Sep 24, 2012)

This was just an example. I recall 4-years fixed at TD is even lower than 2.89% now.

If we know for almost certain we are staying in the home Harold, the rate-insurance protection that comes with a fixed-rate mortgage is cheap right now for sure.


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## cman2 (Jan 14, 2011)

wendi1 said:


> How long are you planning on staying there? Which options allow you to cheaply end the mortgage if you have to? I used ING Direct (now Tangerine) and was very happy indeed.
> 
> Myself, I dislike prime+- rates, and am willing to pay a little extra for consistency.


No intention on leaving at this point. Variable is the cheapest to end if I have to. I would have to pay 3 months of interest at prime.


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## cman2 (Jan 14, 2011)

Clacker said:


> Don't most variables still come with the option to lock in at any time? In this case it looks like Variable will win hands-down.


Yes, you can lock in at anytime but I would have to lock for a period of at least 3 years and I imagine that the rate offered wouldn't be great since they would have all the leverage.


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## cman2 (Jan 14, 2011)

HaroldCrump said:


> That does not sound like a good rate, given that 4 and 5 year fixed aren't that much higher.
> I recently renewed for 4 years at 2.89% fixed.
> 29 bps isn't worth the risk of going variable.


In my case it would be 54 bps. Is that worth the risk? Still haven't decided. I know that every time I've held a mortgage, I would have been better off with variable...


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## Just a Guy (Mar 27, 2012)

Of course, when interest rates were steadily falling, variable rates were always the best...and interest rates have been falling for 15 years or more, so many people forget it can, and will go the other way.

I can't see interest rates falling much further, they don't have much room left to drop. The question is what happens in the future...will they stay low, will they rise? If they rise, how fast?

Our economy is based on cheap money, and it's not very healthy even then. If they decide to raise interest rates, they may try to do it slowly, to mitigate the pain...or they may realize that everything is screwed up, and needs to be reset, so interest rates jump up suddenly, the economy collapses, the country defaults, and they issue a new currency...people scream and yell at the pain, suffer greatly, but have a chance to heal and lick their wounds...of course, that government party never gets another vote ever...

My bet would be a slow increase, with lots of inflation...meaning if you pay it off quickly, you could be making a mistake...inflation is great if you owe money, a lot less to repay...doubly good if your asset rises in value with inflation.


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## HaroldCrump (Jun 10, 2009)

cman2 said:


> In my case it would be 54 bps. Is that worth the risk? Still haven't decided.


A spread of 54 bps probably justifies going variable, assuming it is the true APR and not just the posted rate (variable mortgages compound monthly vs. fixed mortgages compound semi-annually).
54 bps protects you against 2 rate hikes at the most (assuming 25 bps hikes).

However, keep your term short i.e. 3 or 4 year term, not 5.
I don't think we will experience a single 50 bps hike in the next 2 years, but we can get 2 hikes of 25 bps each.

Beyond 2016, your guess is as good as mine, rates can go anywhere.
After all, in 2016, Ontario would have balanced its budget, the federal deficit would be gone, the TFSA room would have been doubled, the Maple Leafs would have won the Stanley Cup, pigs would be flying, etc. etc.


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## Just a Guy (Mar 27, 2012)

But two raises would only bring him up to par. If he had a 5 year, and had two raises, equally spaced to the half way mark, he could afford two more, equally spaced, afterwards and still average out to be the same as the fixed rate over the same term (with compound interest, technically he'd still save).

If rates increase, the fixed rate would also increase by the time he renews...so don't forget to average your rate...variable can still be higher at the end and save you money.


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## My Own Advisor (Sep 24, 2012)

HaroldCrump said:


> I don't think we will experience a single 50 bps hike in the next 2 years, but we can get 2 hikes of 25 bps each.


Agreed.

As for your 2016 predictions, The Maple Leafs would have won the Stanley Cup made me laugh.

I put my money on the pigs flying first :biggrin:


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