# Fixed? Variable? 3-yrs? 5-yrs? Mortgage Rate Hike?



## Kinny (Apr 3, 2009)

Hey guys,

I've asked several mortgage specialists and they seem to be giving me different opinions on what I should do. With an imminent mortgage rate hike, I recently purchased a condo about $475K in downtown Toronto with a 20% down payment. I have no debt, good cash reserve and stable income. Closing is due end of June.

Things I've heard from several mortgage specialists:

- Get a 3-yrs Fixed.
- Stay variable for 3-yrs.
- Get a 5-yrs fixed.

I'm trying to understand their reasoning behind it, and technically each of them makes sense.

1) We are anticipating a rate hike. (When?)
2) We expect rate hike to go up for the next few years. (By how much/year?)
3) Past performance (history) in the mortgage rate cannot really be used to benchmark future because this 2007-2009 Recession is nothing we have seen before. (Predicting becomes harder...)

So, based on what they told me, all three types of mortgage may work. But what's your take on this? What would you do?

Thanks!


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## andrewf (Mar 1, 2010)

My recommendation would be to go with the 3 yr fixed (edit: variable) but make payments equivalent to the 5 year fixed rate. The reason one should go with a 3 year variable rather than 5 year is that in 3 years, the discount to prime will probably be larger than it is now. Most lenders are offering a discount of perhaps 0.2% below prime. This was compressed from the -0.85% seen before the downturn due to the decline in rates. In three years, it may be able to grow again as rates increase.

The reason to pay as though you went with the 5 year fixed is that it allows for ease of budgeting and accelerated paydown when rates are low. I'm pretty confident you'll come out ahead over a 5 year period with a variable paid as though it were fixed. Rates would have to rise something like 5% in the next few years to even get close to breakeven.


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## dogcom (May 23, 2009)

For me I would go for a 5 year fixed rate and if that seems to high then I would not buy the condo. You would probably pay more going for the 5 year fixed but at least you would be safe from disaster.

You hear stuff out there like hyper-inflation and so on so why take that chance with rates so low but ready to go higher. I could be way off here but with every country in the west looking to borrow money it could get dicey in my opinion.

In other words the guys with money may want a much higher rate to lend money to all those countries with their hands out.


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## andrewf (Mar 1, 2010)

dogcom said:


> For me I would go for a 5 year fixed rate and if that seems to high then I would not buy the condo. You would probably pay more going for the 5 year fixed but at least you would be safe from disaster.
> 
> You hear stuff out there like hyper-inflation and so on so why take that chance with rates so low but ready to go higher. I could be way off here but with every country in the west looking to borrow money it could get dicey in my opinion.
> 
> In other words the guys with money may want a much higher rate to lend money to all those countries with their hands out.


There's no reasonable basis for 'hyperinflation' occurring here (in the Zimbabwe sense). One could argue that inflation might be higher than the BoC target of 2%. If that's the case, assuming real wages don't fall, you'll get a pay rise, too, making the higher rate you pay on your variable mortgage affordable.


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## sprocket1200 (Aug 21, 2009)

there is no way real wages won't be falling. my banker read me reports stating that each bank figures prime to be in the 5% range at the end of 2011. even if this is off by a full point (20%) then fixing for 5 yrs at 3.75% is a deal!

i agree with dog, protect yourself from disaster and calculate what that condo would be worth if you had to pay like 6% instead of 2% for the $475,000 at the same payment. I would think about $100,000 will evaporate...


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## Maltese (Apr 22, 2009)

I'd get the 5 year fixed if I needed a mortgage and lock in the current low rate. My first home had an 18% mortgage rate. My second mortgage was 12% and my 3rd a bargain (or so I thought at the time) at 8%. Rates now are incredibly low compared to what they have been in the past. There is no guarantee that rates will stay low in the future.


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## FinancialJungle (Apr 22, 2009)

I recommend variable since the spread between fixed (4.39%) and variable (1.75%) is 2.64%. Only way you'll lose with variable is if rate rises steadily above ~7%, which is highly unlikely.

And even if it does, you'll still be confronted with higher rates comes renewal. Fixed rate only locks the rate for 5 years rather than the entire amortization, and the first 5 years only chops 12.4% off mortgage principal assuming 25 year amortization. If you can't insulate yourself effectively from higher rates, might as well take a chance with variable.


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