# Is this a sign to lock in your mortgage?!?



## Sampson (Apr 3, 2009)

On the same thread as a recent discussion at CC, has the spread between fixed rate mortgages and variable rate mortgages narrowed to the point where its now better to go with the fixed rate?

We've been shopping around to break our existing mortgages, looking and modeling ALL options.

The best variable rates we've been offered have been prime + 0.8% (3.3%). Fixed rates have now come down, and we were offered 3.95% for 5-year closed from one of the 5 big banks.

However, ScotiaBank is now offered 1-year rates at 3.0% - with the option of locking in at the posted 5 year rate minus 1.25% (4.2% as of today).

To me, it seems like they are wanting you to lock in for 1 year - my read on this is they predict rates will be up in 1 years time.

Am I reading too much into this? I know bond yields look to be rising again, and unless the earnings coming out now are horrible, could the stimulus be giving a bit of a bounce to the economy?


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## CanadianCapitalist (Mar 31, 2009)

If you missed the post on the blog, Sampson is referring to this post:

*Bucking the conventional wisdom on a fixed-rate mortgage*

I agree with Ben's conclusion that with the spread between fixed-rate and variable-rate so narrow, now may be a good time for going with fixed. Note that if you have a Prime-x% variable-rate mortgage, it may not be worth to switch, but homeowners renewing their mortgage may want to consider fixed.


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## FrugalTrader (Oct 13, 2008)

CanadianCapitalist said:


> If you missed the post on the blog, Sampson is referring to this post:
> 
> *Bucking the conventional wisdom on a fixed-rate mortgage*
> 
> I agree with Ben's conclusion that with the spread between fixed-rate and variable-rate so narrow, now may be a good time for going with fixed. Note that if you have a Prime-x% variable-rate mortgage, it may not be worth to switch, but homeowners renewing their mortgage may want to consider fixed.


That's the camp that I'm in. I have a discounted variable mortgage that is due in about 2 years. I'm also contemplating locking in if/when inflation indicators start flaring up.


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## Sampson (Apr 3, 2009)

So FT,

I guess this means you are some what fearful of very high inflation starting day X, and continuing 2 years from now?

I'm in two fixed rates (bad, bad, bad) now, and for me or anyone new, I think its a no brainer.

I guess I was after peoples predictions of how long high inflationary pressures would last. I'm actually somewhat worried that it might go on longer than 5 yrs.


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## Bullseye (Apr 5, 2009)

FrugalTrader said:


> I'm also contemplating locking in if/when inflation indicators start flaring up.


By the time you realize that inflation is flaring up, won't fixed rates have already shot up for the same reason?


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## FrugalTrader (Oct 13, 2008)

I do lean on the side that we will get higher inflation.

Bullseye, you are right, it may be too late to lock in at that point.


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## mfd (Apr 3, 2009)

Bullseye said:


> By the time you realize that inflation is flaring up, won't fixed rates have already shot up for the same reason?


I made the same argument to a friend who went with VRM. I showed him how quickly interesting rates shot up in the 70's. Hopefully he doesn't get burned because I'm sure he doesn't have enough play to account for 15% interest rates.


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## Jane (Apr 4, 2009)

when should we consider to convert our VRM to FRM? end of this year?


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## stephenheath (Apr 3, 2009)

The variable rate is based on the bank's prime, which is almost based on the Bank of Canada's overnight rate. I say almost because of the second last rate drop by the BoC where the banks didn't match it completely, but I really don't think the banks would ever independently lower prime independent of the BoC.

The BoC's rate right now is 0.5%, and there is some degree of expectation that this month they will drop it another 0.25%, which should theoretically lower the bank's primes from 2.5% to 2.25%. But beyond that, can it go any lower? What is the effect of the BoC actually going to 0% interest? Is it just a little bit more cash savings for the bank, or would it throw the system out of whack as there would be no reason to seek outside financing or interbank financing? But let's say it does go all the way to 0%... isn't that a definate wall? If the BoC went to -.25%, banks would have no need to lend money, they would just borrow an infinite amount from the BoC and have infinite free profit 

In short, I can't see rates coming down any more than another half point, and to be honest, even if the BoC did go to 0, I would bet the banks won't match that last quarter point because they know the BoC has no more pressure to put on them, especially since their mortgage buyback auctions are now going unfilled. This means that we could be at the absolute lowest interest rates for variable ever within a week. If the spread between variable and fixed is constant, that would also mean that theoretically fixed rates will never be lower than they are at that point as well.

To me, unless there is a way variable could go lower, that would indicate that unless you expect interest rates to stay constant for a few years, the end of the month may be exactly the conditions where 10% of the time fixed mortgages save more money.


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## Sampson (Apr 3, 2009)

Rates could obviously go sideways for some time as governments realize their money hasn't been effective in jump starting the economy.

I no longer see it as a "rates can only go up from here" as I once did.

Because the best VRM available to me now is 3.3% - there's no justification for having exposure to fluctuating rates. I'll just lock in at 4.1% - and take my 'cash back'.


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## wx_junkie (Apr 3, 2009)

I moved to a variable rate mortgage (P+0.5%, 5-year fixed) 2 weeks ago to start my SM.

I understand fixed rate mortgages are becoming more and more appealing right now, however I still feel comfortable with my decision, as I feel I am sort of *hedged* against rising interest rates. Having 3% interest right now allows me to pay quite a bit more of my principal, and thus investing more into equity markets via smith manoeuvre. This extra money going into markets right now while they're beaten down, plus compounding, I feel will offset the amount of extra I will pay if rates shoot up a bit (albeit, if the shoot up a lot, say 6%+, it's a different story). I spent 3 weeks crunching numbers before making the fixed / variable decision, and I am happy with it, even knowing that rates could start going up at the end of this year or a little later.

Now, if I were not doing the smith manoeuvre, I'd have definitely gone fixed.


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## Mike H. (Apr 15, 2009)

If you look around a bit, you can find 5 yr fixed rates at 3.85%.

Any time in the past that governments have run big debts and deficits, it has led to inflation and higher interest rates. If history is any guide (and it's the only guide I have), a person getting a 5 yr rate of 3.85% today will be pretty pleased with themselves a year or two down the road....


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## Ben (Apr 3, 2009)

My sister and her husband were approved last week for 5-year 3.80% from two of the big Canadian banks for their first house. Their mortgage broker said it was the first time in 17 years he couldn't beat the rate. They both have astronomical credit ratings so could perhaps do better yet.


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## Shayne (Apr 3, 2009)

Sampson said:


> On the same thread as a recent discussion at CC, has the spread between fixed rate mortgages and variable rate mortgages narrowed to the point where its now better to go with the fixed rate?
> 
> We've been shopping around to break our existing mortgages, looking and modeling ALL options.
> 
> ...


I call this the Save Now and hope to save later mortgage. No one predicted rates would be this low a year ago and no one can accurately predict where rates will be in a year. One year ago the posted rate at Scotia was 7.55% So 1.25% off of that is not much of a deal. 

I would take the 3.95% or find a broker who can get you 3.69% with 20/20 prepayment priviledges.


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## Rickson9 (Apr 9, 2009)

Mike H. said:


> If you look around a bit, you can find 5 yr fixed rates at 3.85%.
> 
> Any time in the past that governments have run big debts and deficits, it has led to inflation and higher interest rates. If history is any guide (and it's the only guide I have), a person getting a 5 yr rate of 3.85% today will be pretty pleased with themselves a year or two down the road....


If history repeats itself, somebody with a 5 yr 3.85% would be looking at an ugly interest rate environment when the term comes to a close...


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## Mike H. (Apr 15, 2009)

Rickson9 said:


> If history repeats itself, somebody with a 5 yr 3.85% would be looking at an ugly interest rate environment when the term comes to a close...


That is probably true, but what should be done about it? Ten year mortgage terms are available, but the rates are much higher than for 5 years. 3.69% for five years can now be had through most mortgage brokers.

A year ago, variable rate mortgage were available at prime MINUS 90 basis points. Now, prime PLUS 75 basis points seems to be the going rate. I hope that, in five years' time, we will return to a more normal lending environment; and variable rates below prime will be available.

If I were getting a new mortgage or renewing a mortgage now; here's what I'd do:

1. Take the 5 yr fixed at 3.69%.
2. Figure out what my payment would be at 6%, and make extra payments toward principal to equal what the 6% payment would be.
3. Re-assess in 5 years; with an eye toward variable rates.

A sharp person might say, hey, why pay down a debt at 3.69% more quickly than necessary; when I'm confident that I can invest in (x,y,z) and earn more than 3.69%? 

My answer is that a home represents more than an investment; it is a family's security. Whether it goes up or down in value, it still provides a roof over your head. Giving up some potential investment returns or tax advantages may be a good trade-off.


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## Cal (Jun 17, 2009)

Interesting to read some of the posts on this old thread, and the general consensus in regards to rates, and where they were heading, and when the posts were written.....


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## My Own Advisor (Sep 24, 2012)

For sure Cal.

Interesting to read what Mike H. said above, take the 3.69% rate. We ended up getting into a fixed product just over 3% a year later.

I'm thinking I'll go variable? for the next 3-years. Not sure. I have to decide in about 5 months.


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## Oldroe (Sep 18, 2009)

Election this year. Not much will happen with rates.


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## My Own Advisor (Sep 24, 2012)

Good point Oldroe.


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## birdman (Feb 12, 2013)

As I have mentioned in previous threads with some lenders it is also possible to split your mortgage into different buckets. In other words, perhaps 1/3 in variable, 1/3 in 3 yr, and 1/3 in 5 year. Just a thought. I don't normally follow mortgage rates but if the new norm is for vairable rates is P+.50 vs the previous P-.50 somebody is now making lots more money. Maybe time to buy more Bank shs.


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## rikk (May 28, 2012)

Fwiw ... as Garth points out ... http://www.greaterfool.ca/ , "Bottom Feeding", locking in is ok, unless you'll be moving, in which case ... "The typical mortgage-break fee is calculated as the IRD – interest rate differential ... "


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