# Variable vs Fixed?



## Nerd Investor (Nov 3, 2015)

The age old question, just soliciting some opinions on what you would do in today's environment. 
I've started building a house so will have this decision to make soon. As thing currently stand the 5 year variable is 0.69% cheaper than the comparable 5 year fixed rate available to me. 

In the past I've generally opted for variable but not so sure in this environment. We've had 2 quarter point hikes this year already, so theoretically it wouldn't take much for the gap to close. Frankly though, I think the rate increase and optimism was overdone and could see a small drop just as likely as another hike. Having the lowest possible rate when the mortgage balance is the highest also appeals to me; I could still come out ahead over the term even if there's an increase down the road. 

Thoughts?


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## Mortgage u/w (Feb 6, 2014)

There are endless threads about this topic.....but my quick answer is to stick with variable. 

Here's a few questions for you:
- Would you rather have a guarantee to pay 0.69% cheaper, or pay a premium today to _maybe _avoid a rate hike later?
- What if the rate drops instead?
- What will the rates look like in 5 years from now when you need to renew? 
- At renewal, will you lock in another premium rate or stick with the lower rate?


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## Nerd Investor (Nov 3, 2015)

Mortgage u/w said:


> There are endless threads about this topic.....but my quick answer is to stick with variable.
> 
> Here's a few questions for you:
> - Would you rather have a guarantee to pay 0.69% cheaper, or pay a premium today to _maybe _avoid a rate hike later?
> ...


Great points. I'm aware there are a ton of threads, felt like a dummy posting it but at the same time, every environment is different right? Or maybe this is just what people say to talk themselves into making certain decisions


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## AltaRed (Jun 8, 2009)

To me, it depends on one's ability to afford higher payments sometime during the 5 year variable term. If the payments from a 1-2 percentage point increase in interest rate sometime in the next 2-3 years (of a 5 year term), could result in 'dog food' eating habits, then one cannot afford taking the 0.69% benefit now. If one's earning power will continue to increase somewhat methodically (progressively) over the next 5 years, it may be worth the variable rate risk.

With the global economy pretty much in growth synchronization, one can expect higher bond yields (even if there is minimal action of central bank rate changes), but I do expect, short of an unexpected recession, at least 100bp increase in central bank short term rates over that period. IOW, be cognizant of one's ability to absorb any hit.


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## Mortgage u/w (Feb 6, 2014)

AltaRed said:


> To me, it depends on one's ability to afford higher payments sometime during the 5 year variable term. If the payments from a 1-2 percentage point increase in interest rate sometime in the next 2-3 years (of a 5 year term), could result in 'dog food' eating habits, then one cannot afford taking the 0.69% benefit now. If one's earning power will continue to increase somewhat methodically (progressively) over the next 5 years, it may be worth the variable rate risk.
> 
> With the global economy pretty much in growth synchronization, one can expect higher bond yields (even if there is minimal action of central bank rate changes), but I do expect, short of an unexpected recession, at least 100bp increase in central bank short term rates over that period. IOW, be cognizant of one's ability to absorb any hit.


I still can't agree with that assessment and I know everyone keeps throwing the same reason of affordability......if that is really the case, basically those people cannot afford the home beyond their 5-year term.


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## Mortgage u/w (Feb 6, 2014)

Nerd Investor said:


> Great points. I'm aware there are a ton of threads, felt like a dummy posting it but at the same time, every environment is different right? Or maybe this is just what people say to talk themselves into making certain decisions


Its an endless debate and everyone will have their point of view (just as I do). What's important is you do ask the questions and ensure you obtain the best responses to make an informed decision.


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## AltaRed (Jun 8, 2009)

Mortgage u/w said:


> I still can't agree with that assessment and I know everyone keeps throwing the same reason of affordability......if that is really the case, basically those people cannot afford the home beyond their 5-year term.


It depends on wage growth between now and 5 years from now and whatever else is a burden in their current life that they will overcome in 5 years. Could be car loans, still paying off student loans, a new family with tons of expenses, etc. Five years from now, a major increase in mortgage payments may be doable.....versus 3 years from now. IOW, it depends....

I know when I got my first mortage in 1974, I was a hugely more precarious financial position in 1974 than I was in 1979 and could not have tolerated much in mortgage payment growth in the first few years. By 1979, I was in a hugely different financial position and indeed moved up from a semi to a detached in 1980. 

IOW, don't ridicule individual 'situations'. Only the OP can judge tightness of financial position.


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## andrewf (Mar 1, 2010)

Mortgage u/w said:


> There are endless threads about this topic.....but my quick answer is to stick with variable.
> 
> Here's a few questions for you:
> - Would you rather have a guarantee to pay 0.69% cheaper, or pay a premium today to _maybe _avoid a rate hike later?
> ...


I would normally use variable, but I bought last fall, and am now paying less than the discounted from prime I would have had I gone variable. Most of the evidence for variable being better is from the 30 year bull run in bonds. I think that might be exaggerating the benefit of using variable rate mortgages. That bull is over, mostly because rates can't go any lower.


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## Pluto (Sep 12, 2013)

I always used a variable rate. I thought do I want to pay more now wtih a fixed, or more later with a variable. I picked the later and saved the difference for an fund to dip into just in case. over the years the savings piled up at the rate of many thousands per year. Of course the "rasing rate environment" came along as it would. And my payments went up. And jsut as the media was warning of much higer rates in the year ahead, along came the enevitable recession and my rate and payments plunged. 

Everytime I said I wanted a variable they always said "remember when" rates were 15%+. You need protection. My belief was such high rates was a once in two or three lifetime event and it became a scare story to entice people into locking in. 

One rule of thumb I used was when variable rates were close to the 5 year term rates, it suggested short rates would fall, and they want me to go long (to make more money). By going opposite of what they wanted, I saved big time. 

I never tried to predict what rates were going to do. I just looked at historical charts comparing variable to 5 year fixed, and clearly the variable was the winner. 

https://www.google.ca/search?q=5+ye...54nXAhVP3mMKHYLaBm0Q_AUICygC&biw=1440&bih=749


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## AltaRed (Jun 8, 2009)

I think if a person can indeed save the difference, per Pluto, and put it into a 'what if' fund, then variable still makes sense. I agree with Andrew that the 30 year bull market in bonds made variable a no-brainer, that bull market is over. We are seeing increasing bond yield trends but obviously, none of us really know whether that upward trend has solidified enough to sustain itself.


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## caltran (Mar 16, 2017)

AltaRed said:


> To me, it depends on one's ability to afford higher payments sometime during the 5 year variable term. If the payments from a 1-2 percentage point increase in interest rate sometime in the next 2-3 years (of a 5 year term), could result in 'dog food' eating habits, then one cannot afford taking the 0.69% benefit now. If one's earning power will continue to increase somewhat methodically (progressively) over the next 5 years, it may be worth the variable rate risk.
> 
> With the global economy pretty much in growth synchronization, one can expect higher bond yields (even if there is minimal action of central bank rate changes), but I do expect, short of an unexpected recession, at least 100bp increase in central bank short term rates over that period. IOW, be cognizant of one's ability to absorb any hit.


VRM payments don't typically change unless there's a large movement in interest rates. The last time I had a VRM, IIRC the prime rate had to move 2.5% before my payment amount changed. I would suspect the actual allowable variance would depend on the lender. Probably a good question to ask them.

Adjustable Rate Mortgages are probably what you're thinking of. Those are very rare in Canada.


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## Emjay85 (Nov 9, 2014)

caltran said:


> VRM payments don't typically change unless there's a large movement in interest rates. The last time I had a VRM, IIRC the prime rate had to move 2.5% before my payment amount changed. I would suspect the actual allowable variance would depend on the lender. Probably a good question to ask them.
> 
> Adjustable Rate Mortgages are probably what you're thinking of. Those are very rare in Canada.


They definitely do change with rate changes, mine do at least.


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## andrewf (Mar 1, 2010)

The rate definitely changes, maybe if you are paying more than the minimum payment you may not need to pay more.


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## Mortgage u/w (Feb 6, 2014)

caltran said:


> VRM payments don't typically change unless there's a large movement in interest rates. The last time I had a VRM, IIRC the prime rate had to move 2.5% before my payment amount changed. I would suspect the actual allowable variance would depend on the lender. Probably a good question to ask them.
> 
> Adjustable Rate Mortgages are probably what you're thinking of. Those are very rare in Canada.


A variable rate, as most Canadians know, is a rate that is based on the lender's preferential rate plus or minus a discounted rate. The discounted rate will not change for the duration of the term, however, the preferential rate most certainly does since it is based on the BoC prime rate - not necessarily the same though. 

Most lenders currently have a preferential rate of 3.20%. TD has a higher rate at 3.35% and I am not sure if any others differ as well. A typical discount is currently -0.75%. The discount varies greatly from one lender to another. Some are at 0 and some are at +0.20%. When the BoC changes their prime rate, the lenders make a choice of whether they want to reflect that into their own preferential rate. If they do, then they pass the change onto the consumers who hold a variable rate mortgage. The consumer usually has the option of accepting the payment change or can request to keep the same payment by adjusting their amortization accordingly. Not all lenders operate alike or offer the same benefits. This is why I always tell people shopping for a mortgage that its not just about the rate - its about the product.


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## AltaRed (Jun 8, 2009)

My understanding is variable rate mortgage interest rates change with bank prime rate changes (but not BoC overnight changes).


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## Mortgage u/w (Feb 6, 2014)

AltaRed said:


> My understanding is variable rate mortgage interest rates change with bank prime rate changes (but not BoC overnight changes).


That's correct. But usually the Boc rate is what triggers the bank's prime rate to change. That last couple of rate changes from BoC, the bank's followed and increased theirs the same 25bps. The one before they didn't follow and only changed 15bps. TD's additional increase of 15bps was not really triggered by anything and they remain with one of the higher prime rates today.


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## Nerd Investor (Nov 3, 2015)

Thanks for all of the replies everyone. Lots of food for thought.


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## Mortgage u/w (Feb 6, 2014)

Just thought I would post this article under this thread https://www.canadianmortgagetrends.com/2017/11/aware-mortgage-penalties/. It reiterates what I've been saying for years in regards to penalty calculations, mortgage benefits and the whole "lowest rate" theory. "Variable of Fixed" is not the correct question to ask.

"“Internal lender statistics suggest that greater than 60% of mortgages will be paid out or restructured at an average of 36 months,”"

"Consider that the mortgage of choice for 68% of the country’s 5.78 million mortgage holders is the five-year (60-month) fixed, and you can see the issue."

"As we’ve written about previously, many mortgage shoppers tend to put greater emphasis on finding the lowest rate, which may save more money up front, but can potentially cost more over the long run."


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## twa2w (Mar 5, 2016)

A couple of points. Variable rate mortgages are not always based on a banks prime lending rate.
Take TD for example. Their prime lending rate is 3.20% but their mortgage prime rate is 3.35%. 
A subtle difference but it allows them to change their variable mortgage independent of changes in their prime rate and also set a rate higher or lower.
One bank uses or at least used to use, the term, personal lending base rate.

Of course not all banks do this and it may or not work in your favour. 

In regards to > 60% restructure in 36 mo and > 68% take 5 year terms is somewhat misleading as it implies there will be a lot more penalties incurred than actually do. People port mortgages when they sell and buy. They blend rates and blend and extend terms when they move or rennovate. Mortgages are assumed and blended, employers absorb penalties etc etc.

Not to say a lot of people don't pay penalties. They do. And mtg u/w makes a good point with the article. The best rate is not necessarily the best value. 
You really need to look at lots of factors. And even when you do assess them correctly, crap happens - divorce, job loss, unexpected inheritance or windfall etc.

While I think an arguement can be made for both variable and fixed and past performance is not necessarily indicative of future performance, the variable rate certainly gives you the most flexibility and will likely be the least costly. A locked in term on the other hand will give certain people more peace of mind.
Every one has different personalties when it comes to risk and ability to deal with uncertainty - this has to be taken into account here just like in investing.


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## My Own Advisor (Sep 24, 2012)

I believe variable still makes sense.

What's the spread on 5-years right now, about 0.50?

You would need two rate hikes (assuming 25 points per hike) to even things out. Who knows if/when they will occur. 

It also depends on if you might move in the coming years. If you don't know, go with variable. Less penalty to worry about.


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## Nerd Investor (Nov 3, 2015)

Definitely won't be moving, this will be for a new build. We're locked in right now at a fixed rate during the build so I have some time to decide and see what rates do.


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## Mortgage u/w (Feb 6, 2014)

twa2w said:


> ...In regards to > 60% restructure in 36 mo and > 68% take 5 year terms is somewhat misleading as it implies there will be a lot more penalties incurred than actually do. People port mortgages when they sell and buy. They blend rates and blend and extend terms when they move or rennovate. Mortgages are assumed and blended, employers absorb penalties etc etc....


Just to add that when blending rates and/or terms, the penalty is still incured - its just not visible since its factored into the new rate.



My Own Advisor said:


> ...What's the spread on 5-years right now, about 0.50?...



Depends the type of mortgage needed and lender....there are current spreads of more than 1%.




Nerd Investor said:


> Definitely won't be moving, this will be for a new build. We're locked in right now at a fixed rate during the build so I have some time to decide and see what rates do.


That's what more than 60% of people said.......refer to article.
The odds are against you. Knock on wood, but you can have; divorce, death, job loss, relocation, reno, upgrade, downgrade, investment, debt consolidation, etc. etc. etc. As much as we all want to keep things unchanged, there are some things that are just out of our control.


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## TomB16 (Jun 8, 2014)

AltaRed said:


> I think if a person can indeed save the difference, per Pluto, and put it into a 'what if' fund, then variable still makes sense. I agree with Andrew that the 30 year bull market in bonds made variable a no-brainer, that bull market is over. We are seeing increasing bond yield trends but obviously, none of us really know whether that upward trend has solidified enough to sustain itself.


I agree with Mortgage u/w. Variable all the way. It's just a matter of perspective. Red makes some great points that will be primary decision points for some people. I just happen to think about it similar to M u/w.

I just did a quick check and variable is quoted online at 2.5% while fixed is quoted at 2.84%.

Consider this: Calculate the payment at the fixed rate then go with the variable rate but have them set the payment at the fixed rate. You will save years of payments.

The best thing about a mortgage is that, if you ever get into real trouble, the bank is motivated to renegotiate the financing to keep you from going under. Don't just wait until you can't make the payments. Go in when you see the payments outstripping your ability to pay and be assertive until they make the mortgage more affordable for you. You'll end up with a longer amortization so you might give up the savings of years of payments, but there are extreme few scenarios in which you will be worse off than just going with fixed in the first place. Variable for the win, IMO.

Working in the financial industry for years changed my perspective. Interest rates are not going to shoot up, overnight. It would ruin the financial industry and the financial industry has significant ownership of the government so take some risk and sleep well knowing a huge rate increase will hurt the overlords as much as it will hurt you, therefore it won't happen.

That's not to say rates won't go up. They will. They just won't shoot up at a rate faster than can be accommodated for by inflation.


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## TomB16 (Jun 8, 2014)

More opinion....

There is no need to be scared of the high rates of yesteryear. They won't return.

Those rates came from an era when we made stuff and we saved money. Now we are a society of consumers spending 100% of income with no savings. That changes the rules.

If the government bumped the prime rate of Canada up by 1%, that would have a direct and massive impact on discretionary spending and the economy would immediately tank. The government knows this. They will not bump the rate this much. They can not bump the rate this much.

There seems to be a desire to increase the PRoC but the only way to accomplish this is by tiny increments over a long period of time in a way the majority of people can absorb.


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## twa2w (Mar 5, 2016)

The generally accepted reason for the high rates in the past was to fight inflation. But the government was happy to some extent with inflation as they could pay their debts with inflated dollars.

Mr Trudeau, like his father, is leading us into deficits and increasing debt. If this gets out of hand like it did then, you may see the government start to push inflation and the central bank start to resist by setting higher rates.

Having said that, I agree the economy at this point could not stand that and it would take quite a few years before the debt/ deficits get large enough to presure rates up. Hopefully this wont happen and we have learned from our mistakes.

Another factor is that the world has been flooded with money through quantitative easing which is different. One would think this would be inflationary but ii hasn't been yet. It seems to me this may lead to asset inflation rather than price/ wage inflation and indeed we may be seeing this to some extend in real estate and other markets.
How the Fed and other centeal Bankers pull that money out of the economy and manage back to a more normal will be interesting.

I always say never say never. People in the 80's said we will never see low rates again and look what happened.
People on this board in their 20 and 30's and perhaps 40's may see double digit mortgage rates before they retire.

Will it happen in the next 5-10 years. I don't think so, if the central banks and governments play it right to keep the ship upright.


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## banjopete (Feb 4, 2014)

So having said all this. Here's a real life scenario:

We have a rental condo, the mortgage is up for renewal in Feb 2018, the options as presented from existing lender offer are:

1-2 year fixed at 2.89%
3-4 year fixed at 2.99%
5 year fixed at 3.04%
5 year variable 2.47%.

As it's a rental the interest on the mortgage is tax deductible, however paying less is still paying less, and we would be investing the difference. Opinions vary as this thread shows but my risk taking side says I'd rather save the difference right now even in the face likely future rate hikes. The conservative side of me says lock in the 5 year rate which may* be a good rate in in years 2-5.

so?


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## My Own Advisor (Sep 24, 2012)

If you know 1) for a fact you are not moving/selling within the next five years and 2) you believe rates will climb then 3) I would go with 5-year fixed.

There is no way, rather, it is VERY unlikely you'll see double-digit rates again.

If rates increased by even 1%, over the next year, there would be panic in the streets.


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## Mortgage u/w (Feb 6, 2014)

Whether its a rental or owner-occupied property makes no difference on which term to choose. Even though the interest is tax deductible, it doesn't mean its ok to pay the highest rate possible. As I already stated, my opinion is to stick with the lowest rate available right now.

Here's a question for you.......why not consider a 10 year term at 4.09% if rate security is a concern??


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## MrMatt (Dec 21, 2011)

My Own Advisor said:


> If you know 1) for a fact you are not moving/selling within the next five years and 2) you believe rates will climb then 3) I would go with 5-year fixed.
> 
> There is no way, rather, it is VERY unlikely you'll see double-digit rates again.
> 
> If rates increased by even 1%, over the next year, there would be panic in the streets.


Which is why they're pushing slightly more stringent requirements.
The thing is, too many people would be seriously impacted by a 0.5% hike in rates, that's not very much, particularly if you're on variable rate.

Because of the overleveraged balance sheets I think any hikes are pretty risky, and I'd like to think the government has enough capable people to backstop and push back if the politicials try to anything too stupid.

However, at the risk of being political, it looks like politicians are feeling a bit cocky and doing whatever they want irrespective of the "experts".
Depending on your political leanings you can find several examples in either the Trump or Trudeau government.


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## AltaRed (Jun 8, 2009)

I think the US Fed will continue to push through at least two 25bp hikes per year and maybe more, if for no other reason than to temper stock market froth, which is starting to get toppy. Canada will have to follow lockstep for the most part and that could provide the tipping point on RE. Stock bear markets are good to take the froth out, but a 20% haircut is a lot different and manageable than a 30-40% haircut.


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## TomB16 (Jun 8, 2014)

Interesting take, Red.

If the US pulls out of NAFTA, do you think that will somewhat de-couple our economic policies, as well?


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## AltaRed (Jun 8, 2009)

TomB16 said:


> Interesting take, Red.
> 
> If the US pulls out of NAFTA, do you think that will somewhat de-couple our economic policies, as well?


No real opinion but I think we will still have to follow 'loosely' being the weaker sister. At least whatever it takes to keep the loonie from freefall.


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## Just a Guy (Mar 27, 2012)

Well, I believe the USA raised their rates today, and are planning 3 more rate hikes next year, that means variable is likely to increase 1% by next year. This means variable will be higher than fixed in less than 1 year with plans to keep increasing in the following years. 

Now, Canada didn't raise interest rates last time, but I've heard they are considering at least 2, if not 3 hikes next year (which makes sense if they want to keep close to the USA, so again it's likely variable will be higher than fixed by the end of next year. 

If the variable remained lower for more than half the term, and didn't increase to more than double the spread, variable would be better. In the current climate however, I don't see that happening. Variable is always better than fixed in a declining interest rate scenario, or even stable environment. In increasing interest rates, it can be more expensive depending on how fast it rises and how far the split is initially. When you're near zero, it doesn't take much to make it more expensive.

Easiest way is to do the math on a what if scenario. 

I'd say fixed is the way to go in the current climate. My 3.5% 10 year mortgage looks better and better each rise.


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## MrMatt (Dec 21, 2011)

TomB16 said:


> Interesting take, Red.
> 
> If the US pulls out of NAFTA, do you think that will somewhat de-couple our economic policies, as well?


I think pulling out is mostly a negotiating ploy. Trump is a bit unpredictable and tends not to listen, while Trudeau is predictable and tends not to listen.

Trump needs political support from Canadian trading NAFTA states, but he's not beyond pissing off people if he feels like it.
Trudeau has asked for things that are deal killers in the US, hopefully he's just saying it to make his supporters happy, but if he really believes it...


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## banjopete (Feb 4, 2014)

Mortgage u/w said:


> Whether its a rental or owner-occupied property makes no difference on which term to choose. Even though the interest is tax deductible, it doesn't mean its ok to pay the highest rate possible. As I already stated, my opinion is to stick with the lowest rate available right now.
> 
> Here's a question for you.......why not consider a 10 year term at 4.09% if rate security is a concern??


Thanks for all the replies. It seems the crux of the choice is do I believe rates will remain at current levels and not follow the US lead? A move for the longer term fixed is a bet that Canada follows, and a move for the variable is that they chicken out for all the stated reasons. I don’t have a crystal ball but I think we’ll see rates rise over the next few years, how many, how much? who knows. I understand paying the least now, and have seen the historical charts for variable and fixed. We’re definitely not selling.


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## Mortgage u/w (Feb 6, 2014)

banjopete said:


> Thanks for all the replies. It seems the crux of the choice is do I believe rates will remain at current levels and not follow the US lead? A move for the longer term fixed is a bet that Canada follows, and a move for the variable is that they chicken out for all the stated reasons. I don’t have a crystal ball but I think we’ll see rates rise over the next few years, how many, how much? who knows. I understand paying the least now, and have seen the historical charts for variable and fixed. We’re definitely not selling.


What I try to tell everyone is that you should not choose a mortgage rate/term based on a prediction, but rather on your current financial situation and future needs. People seem to feel some sense of security by paying a premium for a longer term rate - 5 years out of a 25 or 30 year amort is far from long term. And no one seems to question what rates will be like at renewal - instead, focus on beating the market in a short 5 year period. At renewal, more sense of security is needed so another 5 year term with a premium is chosen.

If your in the game of predicting, a 10 year term is what you should be looking at. 

If you want maximum savings over a long term period (and not just 5 years), then you should choose short term or variable with the best current rate. At renewal, you choose the best rate again.


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## latebuyer (Nov 15, 2015)

I am interested in selling, but i'm not sure. Is it possible to move from variable to fixed if i decide to switch?


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## birdman (Feb 12, 2013)

I didn't read the entire thread but have you considered a 50/50 or split term mortgage? I believe some institutions may also allow you to split your mortgage into a number of different terms with different interest rates. I know when I was in the business years ago we offered them. I did not do a lot of research but this website came up when I did a search and it makes references to them:
http://www.whichmortgage.ca/

Presumably they are still available.


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## Just a Guy (Mar 27, 2012)

Generally that is not done with a traditional mortgage, but can easily be done with a heloc, depending on the institution. Getting a heloc instead of a mortgage gives you a lot of options and flexibility.


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## Mortgage u/w (Feb 6, 2014)

latebuyer said:


> I am interested in selling, but i'm not sure. Is it possible to move from variable to fixed if i decide to switch?


Generally yes. Most standard variable terms can be converted to a fixed term without penalty.


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## banjopete (Feb 4, 2014)

Mortgage u/w said:


> focus on beating the market in a short 5 year period


This makes sense, who knows what's going on moving forward, we can all speculate but in the meantime we're giving up real savings, potentially years worth. We went with the variable option which gave us the best rate of those offered. Thanks again for the inputs.


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## latebuyer (Nov 15, 2015)

banjopete said:


> This makes sense, who knows what's going on moving forward, we can all speculate but in the meantime we're giving up real savings, potentially years worth. We went with the variable option which gave us the best rate of those offered. Thanks again for the inputs.


Sorry to hijack the thread, but i'm a little confused how variable works. If Coast Capital Savings is offering 2.55 % variable does that mean the bank of canada's 1% prime rate would be added on to that and more if it increases? The reason i'm looking at variable is I may sell.

Sorry i found my answer. Its prime (currently3.2) minus whatever the bank is offering.


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