# What would you do?



## Karlhungus (Oct 4, 2013)

I'm getting a new mortgage and have narrowed it down to 2 options. 2 year fixed at 2.59%, 5 year fixed at 2.99%. Advice?


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## cashinstinct (Apr 4, 2009)

Would there be any reason that you sell your property in the next 5 years ?

Do both mortgages have the same prepayment privileges ?(example: pay 15% of balance extra every year)

With what interest rate you would be comfortable paying starting year 3 ?

A 2 year mortgage gives you more flexibility, but you might have to pay a higher rate starting year 3.

Also, depending on your mortgage balance, the 0.40% difference will have more or less impact.

(I am no mortgage specialist / only my opinion).


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

Why those two options? What are your intentions with this mortgage? Personally I would choose option 3 - 5 year variable at 2.40%.

If you are only looking at the rate, you are focused on the wrong thing. A fixed rate carries a high penalty should you break your mortgage. If you are with a bank, the lower the rate you get, the higher the penalty since they use ridiculous posted rates to calculate your penalty.

Figure out what the future holds for you. Will you make it 2 years or even 5 years without ever touching your mortgage? Without selling? Without renovating or without pulling out more equity for renos or investments? 2 years is possible....5 years less likely.

That's why a variable it most versatile - you pay the lowest rate and can easily opt out at any time for a small 3 month penalty OR lock in a fixed term should you get scared of rate hikes.

Choose wisely.


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## Karlhungus (Oct 4, 2013)

New house, plan on staying for 5 years plus. Maybe even 10. Prepayment privileges are the same for both and both options are portable. I usually chose variable but the gap is too close IMO. Would have to be at least 1% difference for me to think about it. Lots of talk of rates raising in mid 2015 and they only have to raise once and I would be better off with the 2 year. I included the 2 year because it is the cheapest of all the rates. Im with a mortgage broker.


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

Thats the whole issue - you're only looking at the rate and nothing else. But if you want to compare jut the rates, you're still better with the variable. If you estimate rates will rise, will they rise in the next year? 2 years? Have you calculated how much you'd be saving during the time the rate does not increase? And how many times will the rate have to increase for you to have been better off with the higher fixed rate? The difference between 2.40% and 2.99% is still considered large. Before the rate catches up to 2.99%, you will have to surpass 2.99% to average out the savings for the time you were paying 2.40%....so it would have to rise considerably high (think 3.50%+)

That's just one aspect. But really, the penalty part is where the savings are. What happens if you lock in 2.99% and rates drop to 1.75% within the next 5 years? Would you not want to bail out and take advantage of the lower rate?

1.75% may seem impossible - but when rates hovered 4% apx 5 years ago, no one ever imagined they would have dropped below 3%....well they did and are still below 3%.

As for rates increasing in 2015? maybe. But "they've" been saying that for the last 3 years! If you had a 2 year rate then, was it that good of a deal?

Conclusion: Go with what you're most comfortable with. Some people can't sleep knowing their rate is not 'locked in'. And go with something that best caters to your present and future needs.


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## Karlhungus (Oct 4, 2013)

How am I looking at the rate and nothing else when I've stated what the terms are? Not only that but at the end of the day, the rate is the most important part, and should be considered above anything else. 

Let me reiterate, if I chose the 2 year rate instead of variable, the rate would have to jump only once to be ahead.


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## marina628 (Dec 14, 2010)

Since you don't plan to sell any time soon I would just take the 2 year rate and save the .40 when the balance is at it's highest.


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

Karlhungus said:


> How am I looking at the rate and nothing else when I've stated what the terms are? Not only that but at the end of the day, the rate is the most important part, and should be considered above anything else.
> 
> Let me reiterate, if I chose the 2 year rate instead of variable, the rate would have to jump only once to be ahead.


It may have to jump only once to be slightly ahead.....but it would have to jump beyond that in order to offset the savings you gained during the time you paid a lower rate.

The rate is *not *the most important part - marketing does a good job at letting you believe that. 

If banks had to rely on your 2% or 3% interest rate to make billions in profits - we'd have issues......


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## Pluto (Sep 12, 2013)

Variable or two year. I prefer variable. It is true that if rates go up, variable is soon to follow. But it is the same at the other end. When rates go down, variable is the first to follow. I've always used variable and over time, saved tons of money. My guess is most of the time the lender wins when one locks in.


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## Karlhungus (Oct 4, 2013)

Well this is my thinking, take the 2 year. Because I'm thinking rates will rise but so will the discount for variable mortgages and in 2 years the discount might be prime -1%. Better to have prime -1% in 2 years then prime -.6% for the next 5.


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