# Mortgage Renewal....Variable or Fixed?



## plaza (Sep 16, 2010)

My mortgage on a 5 plex (230k) is coming up for renewal at the end of the month. I am currently with TD. I was thinking of moving to a broker since he was offering me 0.10-0.15% less on a 5 year fix, but after the discharge from TD and running around to move over to another, I am not sure it is worth it. I used to have a great relationship at my branch, but they have completely changed the staff in past 6-9 months and I am less happy with the service. I was offered 2.79% on 5 year fixed and 2.4% on 5 year variable. I am also considering a non-fixed variable term for a few months since everyone is expecting another rate drop in March. 

I have a 20 year amortization left. I was debating going with a 15 year. The difference between the two is $157/bi-weekly ($4082/year). Being an investment property and interest being deductible, am I better off taking the 20 year one and putting the balance into a RESP or TFSA?


What do you guys suggest?


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## Just a Guy (Mar 27, 2012)

First off see if TD will match the rate the broker found...chances are they will. If they don't, see if the new bank will offer to offset some or all of the transfer/discharge fees, chances are they will.

Since you provided no information on the cash flow of the property, making an informed decision on your specific case is difficult, but generally, use your income to pay off all your personal debts first (credit cards, personal mortgage, etc.), next max out your other savings (TFSAs, RRSP, RESP, etc), then worry about the rental property mortgage (unless you want to buy more rentals or want to open some unregistered accounts). 

With a 5 plex and a $230k mortgage, you shouldn't have any problem with cash flow should the interest rates increase, so I probably wouldn't worry about paying off that mortgage unless you have too much money coming in and no other debts.


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## plaza (Sep 16, 2010)

I have no personal debts or personal income, but also not making a lot of personal income either. I am pretty much living off my properties income (a 5 plex and 2 condos) and that is enough for me to cover all my monthly expenses. I used to make higher income but paid a lot more income tax also and saw my family a lot less, so decided to make change.

As for TD matching...Their mortgage department called me to offer me their best rate and when I told them what I was offered they said they could not do that. In the past I would call up my manager and he would match for sure, but with all the new staff lately, they have not been very accommodating

Thanks


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## Just a Guy (Mar 27, 2012)

Go into the branch, there are several different departments, each with their own underwriters and approval methods. I know TD has several as I deal with them. The telephone guys have the least ability to change I've found.

The banks make a lot of money from you, I'd be really surprised if they let you walk, especially on a 20 year amortization. 

Also, I'd suggest you keep the amortization high, but arrange your payments as if they were lower. So keep the 20 years, but pay as if it's 15 years...that way if something were to happen, you could easily reduce your payments back to the 20 year amount. Something you can't do if you lock in at 15.


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## plaza (Sep 16, 2010)

Ok I just put in another call to the branch, if not will go in person tomorrow. The best rates I found were 

Variable 2.15%
3 year fixed 2.59%
5 Year fixed 2.74%
10 year fixed 3.50%

Which would be the smartest choice since it's a revenue property and interest is deductible? As for arranging to increase your payments like you suggested above, would it not be wiser to put the difference towards RESP or TFSA?


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## Just a Guy (Mar 27, 2012)

I agree it's better to put the money elsewhere, you were just talking about changing to a 15 year...if you have no income, writing off interest may not be that important, though with 7 doors, you obviously have income and can use the deduction...

Man, 3.5 for ten looks tempting...

Depends on where you think rates will go though. Personally, I like stability with my rentals...knowing my expenses, so I usually lock in. I also don't think rates can go much lower. The government was hinting for years that they wanted to raise rates, but then they cut them again...

Ask about all the other years too...sometimes they have interesting off years like 4 or 7. 

Again, look at your cash flow, but I can't see 3.5 being bad in the long term, even if you do pay a bit more, it's other people's money and you could buy bank stocks in a TFSA where the dividend alone is higher.


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## plaza (Sep 16, 2010)

I am kind of annoyed with TD branch because I wanted to renew early on a variable at 2.30% until i decided what I would lock into after the rate decision in March. I just spoke to toll free mortgage center and they told me that they can only renew early on the 1st of every month...so I just lost approx $150 because my branch has not returned calls.

Yes 3.5% is tempting...this is the best rate I found...TD is prob 3.65% on 10 year, but I am at 3.79% now, so still good and like you said it's stability!


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## Just a Guy (Mar 27, 2012)

As I said, the telephone guys are different from the in branch guys, who are different from the independent mortgage specialists, who are different from the private client services guys, who are different from the small business guys...

And these are all in TD. I've renewed earlier and on days other than the 1st. Don't take no for an answer, keep asking until you get the answer you want.

On a side note, I too have noticed a decline in td's service.


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## plaza (Sep 16, 2010)

Will do. I put a call in for the branch manager. Honestly only reason they still have me is because i get the service fees waived with the minimum required balance. If they remove that , then I am out of there very quickly. Is customer service at other banks like RBC, CIBC, BMO, etc any better?


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## Just a Guy (Mar 27, 2012)

Not in my experience. Each have their good and bad staff, but overall service is pretty terrible in all of them. People are considered a barrier to making profits. Most of the descisons are now coming from corporate head offices, with little branch power.

TD has better hours...

Also, rental investing is currently on the outs with all banks, probably dictated by the Feds. I had trouble getting a mortgage on a clear title...they'd offer me a credit card with a limit high enough to buy a house, but it was pulling teeth to get the mortgage...


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## My Own Advisor (Sep 24, 2012)

Well, I hope I get these rates later this year.....

I would love to take about a 3-year fixed around 2.59%.


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## plaza (Sep 16, 2010)

Why only a 3 year instead of a 5? Trying to understand the reasoning


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## none (Jan 15, 2013)

The best method is to take the variable but pay it off at the fixed rate. So some simulations in Excel, you will be amazed at the insulating power of potential future changes in interest rates that those small additional payments on the principle make. This method is well within the 'no brainer' territory in my opinion.


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## Just a Guy (Mar 27, 2012)

None, you're a tenant, no offence intended. Home ownership, being a renter, and being a real estate investor are not the same thing. Being debt free as a real estate investor isn't always the best solution, in fact there are some real benefits to carrying mortgages...unlike owning your personal mortgage.


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## none (Jan 15, 2013)

Sure I'm a renter but I haven't always been one. I extracted my significant pound of flesh from the real estate market a couple years back and I'm out. There are bigger fish to fry.

Sure, it's all about cash flows - people forget that; however people tend to try to hyperoptimize things (eg. chasing exceptionally low MERs) and it's just noise that offers little value.

in the realm of good choices paying off a mortgage is within that bin - you might do better having some in the market (chances are probably a bit) but at the variable vs fixed argument (2.15 vs 2.8) or something? It's really not worth our time debating the merits of those two approaches in this context. Variable vs fixed? variables payed off at fixed rate. Easy peazy.


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

My opinion is to go variable - always variable. 

You'll be kicking yourself when you break the term and learn the penalty to pay if you go fixed rate.


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## none (Jan 15, 2013)

Mortgage u/w said:


> My opinion is to go variable - always variable.


The odd thing about the variable vs fixed rate argument is the way it's phrased. if anyone said - you can take a variable and buy an insurance policy of $4000 (or whatever) to ensure you don't pay more that X, no one would go for it. Wrap it into a fixed rate and then you have some sales. Weird.


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## gt_23 (Jan 18, 2014)

plaza said:


> Ok I just put in another call to the branch, if not will go in person tomorrow. The best rates I found were
> 
> Variable 2.15%
> 3 year fixed 2.59%
> ...


Take the variable and go with the 20 year am. Those rates are competitive and its not worth switching for 10 bps. Going fixed is a mistake in your case.


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## Just a Guy (Mar 27, 2012)

Variable is only better if the interest rate stays lower than the fixed rate for half the term (assuming equal rises). Personally, I think the rates will climb more than 1.35% for more than 5 of the next ten years, but I've been wrong before. That's just over a .25% rise each year...rates used to move a lot more than that each quarter.

That being said, at these rates, we're not talking a lot of money in the grand scheme, and a significant cost is locked in for half the life of the mortgage. Better to be "insured" as people put it than exposed to hyperinflation.


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## gt_23 (Jan 18, 2014)

Just a Guy said:


> Variable is only better if the interest rate stays lower than the fixed rate for half the term (assuming equal rises). Personally, I think the rates will climb more than 1.35% for more than 5 of the next ten years, but I've been wrong before. That's just over a .25% rise each year...rates used to move a lot more than that each quarter.
> 
> That being said, at these rates, we're not talking a lot of money in the grand scheme, and a significant cost is locked in for half the life of the mortgage. Better to be "insured" as people put it than exposed to hyperinflation.


I make decisions on data and there's two important pieces that taken together are relevant to this decision:

1) Variable regularly beats fixed with statistical significance over a good period of time
2) Professional and amateur forecasting of economic variables is no better than flipping a coin

So even if you choose to ignore #1 on the basis of "but...this time is finally the exception!" #2 still ensures that the outcome is basically left to chance. As an investor myself, my "insurance" is good operating income to absorb any debt service increase and marketable, in demand, properties. If hyperinflation comes along then I will be in a position to increase my rents at similar rates.


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## Just a Guy (Mar 27, 2012)

#1 is only true where the rates continue to drop or remain stable. If the rates continue to increase, they won't be as good. For the past 15+ years, the rates have continually dropped...to a point now, where they can't continue to decrease.

As for #2, as I said I've been wrong before, but I still believe rates are more likely to go up than down. I also foresee dire consequences if the rates so go up...but at these rates, I don't really care. Any rate under 5% isnt worth complaining about, and it's not my money anyway. 

Hopefully, if hyperinflation comes along, your renters will be able to continue paying rents to absorb the increased rates. If you were locked in, you'd inflate away your debt, if you were variable, you'd be paying through the nose...but, I don't really think we'll see hyperinflation.


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## plaza (Sep 16, 2010)

I got a call back from the branch and they are pretty fixed on their rate even though I threatened to leave.

She told me best she can offer is

Variable 2.30%
3 year fixed 2.74
5 year fixed 2.89%

She also mentionned she has a cashback program for investors/revenue properties. 2 year @ 2.94% plus 1% cashback at closing or 5 year fixed @ 4.74% with 5% cashback


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## gt_23 (Jan 18, 2014)

Just a Guy said:


> For the past 15+ years, the rates have continually dropped...to a point now, where they can't continue to decrease.


Firstly, they don't need to decrease, they can bounce around current levels for a long time, which is likely when you consider that economic growth is not likely to reach the levels it did in 2H of 20th century, at least in the near- to medium-term.

Second, rates can very well go lower. There's still 75 bps to get to 0 on short-term rates, and they could even go negative, as in some European countries.



Just a Guy said:


> Hopefully, if hyperinflation comes along, your renters will be able to continue paying rents to absorb the increased rates.


In the age of the modern politician and interventionist economics, high inflation = economic growth = high rents. There's always a chance I get struck by lightning, but it doesn't keep me up at night and I would never waste my money insuring against it.


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

plaza said:


> I got a call back from the branch and they are pretty fixed on their rate even though I threatened to leave.
> 
> She told me best she can offer is
> 
> ...


Be careful with cashback programs....the cashback portion is to be paid back whenever you break your term (pro-rated). I would still choose the variable. Its a known fact that lenders will not fight for existing clients since their money is already out there.....they will always favor new clients since it is considered 'new money'. If you want better, you'll have to take your new money elsewhere.


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## MrMatt (Dec 21, 2011)

Mortgage u/w said:


> Be careful with cashback programs....the cashback portion is to be paid back whenever you break your term (pro-rated). I would still choose the variable. Its a known fact that lenders will not fight for existing clients since their money is already out there.....they will always favor new clients since it is considered 'new money'. If you want better, you'll have to take your new money elsewhere.


Wow, they're really gouging the cashback, at those rates, they get back almost double what they "gave" you.
When I got my 5% cashback, it was simply 1% more for 5 years.


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## off.by.10 (Mar 16, 2014)

Just a Guy said:


> Variable is only better if the interest rate stays lower than the fixed rate for half the term (assuming equal rises).


That's not true as you're paying more interest at the start of the term than at the end. How much of a difference it makes depends on the amortization period but it is surprising. There was a web page detailing a sample case which I unfortunately can't find again but the point was that the variable rate could go up more than you think while you'd still come out ahead or break even vs the fixed rate. This effect is greater with shorter amortization periods because the principal will decrease more over the term.


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## none (Jan 15, 2013)

off.by.10 said:


> That's not true as you're paying more interest at the start of the term than at the end. How much of a difference it makes depends on the amortization period but it is surprising. There was a web page detailing a sample case which I unfortunately can't find again but the point was that the variable rate could go up more than you think while you'd still come out ahead or break even vs the fixed rate. This effect is greater with shorter amortization periods because the principal will decrease more over the term.


^ Exactly.. You're last point describes what I was saying previous - take variable but pay it off at the second choice fixed rate (something like 15-yr variable vs 13 year variable). Seriously, it works pretty. I can supply a spreadsheet if requested.


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## mcu (Dec 6, 2009)

none said:


> ^ Exactly.. You're last point describes what I was saying previous - take variable but pay it off at the second choice fixed rate (something like 15-yr variable vs 13 year variable). Seriously, it works pretty. I can supply a spreadsheet if requested.


Sure I would love to see the spreadsheet. If it was my personal home, I would pay it off ASAP like I did, but being an income property, I was wondering if I was looking at it wrong and should invest my money elsewhere since interest was tax deductible. Remember that if I pay off the property next year for example, my income rises and get taxed more since I have no interest deductions. If I take advantage of that deduction and invest the balance in other things allowing them to grow with time, wouldn't it be better?


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## My Own Advisor (Sep 24, 2012)

@plaza, I might go 3-year fixed or variable, not sure yet, but 3-year since I might only have 4-5 years left on the mortgage at time of renewal and rates could??? be more subject to change the longer the term.


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## GuzzlinGuinness (Nov 28, 2014)

I just renewed, went 5 yr variable.

Prime -.70 

Gonna ride the variable coaster. With any luck it will be a flatline.


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## plaza (Sep 16, 2010)

What do you mean 5 year variable? I thought variable was month to month.


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## GuzzlinGuinness (Nov 28, 2014)

plaza said:


> What do you mean 5 year variable? I thought variable was month to month.


What do you mean month to month?

5 year closed variable mortgage at Prime -.70 . Meaning right now the effective rate is 2.15%.

That means for the next five years, my mortgage rate will always be the banks prime rate - .70% . Meaning it could go up , down, or stay the same.

The variable rate is tied to the Bank of Canada's overnight lending rate (in theory). The Bank meets 8 times a year to announce if it's changing their rate.. so the rate (in theory) can only move up or down 8 times a year. Not every month. ( in theory). 

However, it's really tied to my lenders (ie retail banks) Prime rate. Which (in theory) they could screw with at any point.

So while Bank of Canada's rate is 2.75%, the bank's prime is only 2.85% , hence the 2.15% rate when you subtract that Prime discount of .-70% as a term of the mortgage.

I think you mean you thought the rate *would* change every month.. is that what you are getting at?


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## Just a Guy (Mar 27, 2012)

You lock in for 5 years at a variable rate (usually prime +/- X%). If you break the mortgage, you are subject to penalties (usually 3 months interest differential). After 5 years, you lock in for another term. 

The rate is calculated month to month, but the rate (+/- X%) is that they give you to lock in.


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## plaza (Sep 16, 2010)

I know and understand the prime rate and how it could change. I was just under the impression that with variable you never were locked in and can sell/break your mortgage at any time. Kids of like a month to month plan


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## GuzzlinGuinness (Nov 28, 2014)

plaza said:


> I know and understand the prime rate and how it could change. I was just under the impression that with variable you never were locked in and can sell/break your mortgage at any time. Kids of like a month to month plan


You can break any mortgage at any time, including a closed mortgage (which is what most people have, 5 yr fixed closed or 5 year variable closed).

There is just a penalty in every contract, and they can be quite steep. The lenders will usually call this a "prepayment charge" or a "compensation charge" something nicer sounding than a "penalty".

Closed fixed rate mortgages use an interest rate differential calculation which can vary quite wildly based on your term or discount you received off the posted rate when you signed up.

While variable closed mortgages generally use 3 months interest, not an interest differential, as penalties.

You are thinking of an *open *mortgage, be it fixed or variable, where you can walk away (ie pay it all off or switch it to a new lender) with no penalty any time you want.


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## gt_23 (Jan 18, 2014)

plaza said:


> I know and understand the prime rate and how it could change. I was just under the impression that with variable you never were locked in and can sell/break your mortgage at any time. Kids of like a month to month plan


Variable penalty is less punitive than fixed - only 3 mos of interest. You can also switch it to fixed anytime without penalty.


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## plaza (Sep 16, 2010)

ok thanks for clarification. I always thought variable had no penalty only fixed did. So where did you get 2.15% on a 5 year variable? I was also under the impression if I did variable and the rate fell next month I could get a better rate or lock into a 5 year fixed at a better rate than today's 5 year fixed


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## GuzzlinGuinness (Nov 28, 2014)

plaza said:


> ok thanks for clarification. I always thought variable had no penalty only fixed did. So where did you get 2.15% on a 5 year variable? I was also under the impression if I did variable and the rate fell next month I could get a better rate or lock into a 5 year fixed at a better rate than today's 5 year fixed


Through my mortgage broker. It's with Scotiabank. 

What you are actually negotiating with a variable rate mortgage is the discount the lender will give you off of their prime rate. Generally speaking, the larger the Prime - (minus) discount you can get, the better.

So IF their prime interest rates fall, you get the biggest benefit, and IF their prime interest rate rises, you get the smallest increase possible.

Example:

You lock in a variable at prime -.5% from a lender.

Prime is at 3% when you sign the mortgage. So your rate is 3.00 - .5 = 2.5%

Prime goes down to 2.5% at some point.. your rate would be 2.5 - .5 = 2.0%

Prime goes up to 3.5% your rate is 3% etc etc. You've stated you get all this, so forgive the repetition..


_However_ banks could also reduce the discount they give variable customers based on market conditions.. for example if rates fall further, it might squeeze margins, and they might try to hold the line a bit.

Meaning in theory, if you waited months to renew your mortgage, they might say, Prime -.5% ??!? Not with the way rates are falling, we will now offer you Prime -.25% as our best variable rate.

So with that "discount", if Prime drops from 3% to 2.5% for this newer customer, their rate would be 2.5% -.25 = 2.25%.. 

So the first customer with the bigger discount gets a lower rate in comparison.


The fixed rates are tied to the bond markets, which means that they could also go up or down daily/weekly (in terms of what the bank will offer you to lock in at). 

If the bond market falls on 5 year bonds or whatever length of bond matches the years you want to lock in for.. you could very well get a lower fixed rate next week.

It's not an exact science this mortgage rate game.


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## Just a Guy (Mar 27, 2012)

You can get an open mortgage, which can be broken at any time without penalty, however the interest rate is significantly higher.


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## Mockingbird (Apr 29, 2009)

Also on a side note - unless I'm mistaken, I believe TD only offers the collateral mortgages. Hope you understand the differences between conventional and collateral. Cheers..


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## dougboswell (Oct 25, 2010)

A few comments:
1) the penalty to break a fixed rate is either 3 months interest or the interest rate differential, whichever is higher.
2) The are 2 kind of variables - regular and capped
3) If you switch from a variable to a fixed you get the going 5 year rate. If variable rates are rising and you want to know what your payments will be monthly or peace of mind one may do this.
4) Most lenders that have a line of credit secured by the house are collateral mortgages now - the fixed rate portion and the LOC. RBC with its HomeLine, definitely National Bank and others. If you break the collateral mortgage early you will need a lawyer to do the discharge and set up a new one. Usually in the range of $1000


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## piano mom (Jan 18, 2012)

We haven't have a mortgage for ten years now but when we did, we always went with the lowest rate regardless of terms. It worked for us because we intended to have it paid off within a short period of time i.e. 2 to 3 years. It didn't make any sense to us to lock in long term and pay more.


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## My Own Advisor (Sep 24, 2012)

Variable 2.30%
3 year fixed 2.74
5 year fixed 2.89%

Those are some great rates. Geez, variable looks like a steal. I might have to go variable for the next term, maybe 3-years or so.


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## piano mom (Jan 18, 2012)

Also, the beginning of a mortgage life is when the capital is the highest. You can save a lot of interest at the lowest rate regardless of term. When the rate eventually rises and hopefully you have worked hard at paying down the mortgage considerably, higher interest rate will not be an issue on the smaller remainder of your mortgage.


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## dougboswell (Oct 25, 2010)

My Own Advisor said:


> Variable 2.30%
> 3 year fixed 2.74
> 5 year fixed 2.89%
> 
> Those are some great rates. Geez, variable looks like a steal. I might have to go variable for the next term, maybe 3-years or so.


Actually there are a lot of lower rates out there. If you go to ratespy.com and plug in 5 year fixed or variable there are rates of 2.48 and 1.91. There maybe restrictions on them such as no breaking during the term or 30 day close etc. As with anything it is up to the consumer to ask questions and get the details and conditions.


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## OurBigFatWallet (Jan 20, 2014)

I'm not really a fan of a 5 year fixed rate mortgage as it usually works out to be the most expensive. My mortgage is up for renewal later this year and my plan is to go with another 3 year fixed rate at 2.49% or variable at 2% (assuming of course rates stay the same between now and later this year)


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## My Own Advisor (Sep 24, 2012)

I was just on Ratehub and noticed 3-year variable at 2.05%. That is very good. I hope I can get that later this year.


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## plaza (Sep 16, 2010)

My bank does not want to match the best rate of 2.15% for a 5 year variable. The best they are willing to do is 2.26%. Over the 5 years if the rate stayed the same (which it will not) we are looking at $1100 difference. Is it worth arguing and moving around to get 2.15% or just grab the 2.26% and move on?


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## nobleea (Oct 11, 2013)

plaza said:


> My bank does not want to match the best rate of 2.15% for a 5 year variable. The best they are willing to do is 2.26%. Over the 5 years if the rate stayed the same (which it will not) we are looking at $1100 difference. Is it worth arguing and moving around to get 2.15% or just grab the 2.26% and move on?


Ask for other benefits to make up the difference. Like waiving monthly banking fees or many free interac email transfers or some such thing. If it's an internal cost, they'll be more willing to eat it.
When I was looking to renew, the variable rate offered by my bank was 0.05% higher than the best out there. I asked them to waive my monthly banking fees ($8/mo I think) and they did. That saved more than the 0.05% rate difference. And since it was a collateral mortgage, they are still not charging me the monthly fees even though the mortgage is paid off.


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## plaza (Sep 16, 2010)

nobleea said:


> Ask for other benefits to make up the difference. Like waiving monthly banking fees or many free interac email transfers or some such thing. If it's an internal cost, they'll be more willing to eat it.
> When I was looking to renew, the variable rate offered by my bank was 0.05% higher than the best out there. I asked them to waive my monthly banking fees ($8/mo I think) and they did. That saved more than the 0.05% rate difference. And since it was a collateral mortgage, they are still not charging me the monthly fees even though the mortgage is paid off.


All my monthly fees are waived already because i carry the minimum balance. I have the TD Select account which carries free security box, travellers checks, etc


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## joncnca (Jul 12, 2009)

logically, i would suggest that a fixed rate mortgage would always be the most expensive for the homebuyer...

the bank's goal is to make the most money off of you. they must know, in some fashion, that the variable rate will be lower than the fixed rate; that is why they always try to convince you to "lock in" to a fixed rate, usually through fear mongering, threatening you with the idea that rates could "go up at any time" even while also suggesting that you can "lock in at any time" if you have a variable rate mortgage.

so why would they even offer a variable rate to you, if they know that a fixed rate will make them more money? competition with other banks that will/might offer the variable rate, and to perpetuate the illusion that you have a choice.

stick with variable. and if they really do allow you to lock in at any time, then lock in when your comfort level demands it. but start with variable. personally i'd also go with closed, it's cheaper. 

if you plan to sell within the term...maybe you shouldn't buy in the first place. and if an emergency comes up that requires you to sell, just suck up the pentalies...you can't plan only for emergencies, you have to plan for what you expect to happen, but be mindful of emergencies, not the other way around.


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## Just a Guy (Mar 27, 2012)

I'd point out that this is a mortgage for a revenue property, not a residence.

Thanks to taxes, it doesn't really matter as you probably won't get to keep any of the money regardless. If you don't give it to the bank and write it off, you'll give it to the government in the form of taxes on the income you keep.

It's not really worth the time and effort worrying about $1000 over the course of 5 years...sign up for something and get on with making money, the time you're wasting worrying about it could have made you $1000 by now. Besides, it's the tenant's money not yours...it's only potential money for you, nothing is really coming out of your pocket.


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## joncnca (Jul 12, 2009)

Oh a revenue property, then I agree with just a guy


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## Terminator (Dec 17, 2014)

Bumping another thread again (my apologizes if this is frowned upon, I just thought since its relevant, it makes more sense to continue a thread already focused on the subject)

Anyways, my mortgage is up for renewal within 6 months and I'm really having a hard time deciding between the never ending variable vs fixed debate. This is my first mortgage and first time it has come up for renewal (I went with a 5 year fixed rate when I first got the mortgage). So admittedly, I am still very new to all this.

A few thoughts I have as of right now...

Looking back on the past 5 years, I would have done better going variable (it's so easy looking back isn't it? lol), but going forward, I don't know how much lower rates will get and how good of an idea variable will be in the long run. I'm especially concerned with all the talk about a Canadian real estate bubble about to pop. I believe I am much more susceptible to this since I live in Alberta. Another thing I need to consider is that I am in the process of switching careers. (I do expect to take a decent pay cut until I gain some experience, compared to my current job) I should make this career transition within the next year.

As of right now, my current mortgage payments equal about 18% of my NET income per month. 

From my quick research, there seems to be less than a 0.75% difference between variable and a 5 year fixed (according to local brokers postings), so I'm not sure if variable would come out ahead if I'm looking collectively over the next 5 years. (I keep thinking to myself, how long can rates really stay this low for?)

I realize ultimately it comes down to whatever I feel most comfortable with doing, but I guess I'm just looking for opinions/feedback and suggestions. Any blogs, articles, websites, etc that can maybe help me with my decision would be beneficial as well.


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## Just a Guy (Mar 27, 2012)

It mostly boils down to your personality. If you like knowing what your payments will be for the next 5 years, then get a fixed rate. If you're willing to take more risk, and possibly get more reward, then variable is the way to go.

As long as rates continue to fall, variable is the best way to go.

If rates stay the same, variable is the way to go.

If rates rise, as long as the mean rate doesn't go over the fixed rate, variable is the way to go (so, even if you pay more than the fixed rate for one year, you could still be better off over the entire time depending on the amount for example). 

If rates increase rapidly or continually however, you'll probably regret it. 

So, it boils down to how much are you willing to pay for security?


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## none (Jan 15, 2013)

It's ALWAYS variable. Fixed rates already have uncertainty in future rate increases incorporated into them so at worst you are buying an equivalent product.

Take variable and pay it off as if you took the fixed rate.


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## rsyl (Aug 15, 2014)

Terminator said:


> From my quick research, there seems to be less than a 0.75% difference between variable and a 5 year fixed.


Another way to look at this sentance, the 5 year fixed is currently 1-(2.79/2.04) = 37% more expensive. (I can't find that split though, best I can find is 2.64% fixed and 2.05% variable) but the logic remains.


at 2.04 your payments per 100,000 is $425 including $9,364 for the first 5 years interest (25,500 paid total)
at 2.79 your payments per 100,000 is $463 including $12,879 for the first 5 years interest (27,780 paid total)

If you calculate in a annual increase on the variable you get:

situation 1: @0.25% increase annually: Payments per month being approx (425, 438, 450, *463*, 475) total of $27,012
situation 2: @0.50% increase annually: Payments per month being approx (425, 450, *475*, 500, 525) total of $28,500

Variable is almost always cheaper than fixed. But there is risk involved. I would likely choose to go variable but make payments based on the fixed percentage. if money is not tight and you can afford year 3,4,5 in situation 2, if you can't afford years 3-5 in situation 2, I would go fixed. (but expect a huge increase after year 5)


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## none (Jan 15, 2013)

What people don't get is that there is risk with fixed. You start with an automatic loss.

That's why you take the variable and pay it off at the fixed rate. 

I.e pay off the 100K at $463 a month but take the 2.04 rate. That additional insulation from the risk makes it almost risk free and allows you to fairly compare the two strategies)


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## joncnca (Jul 12, 2009)

yah like i said, seems that variable is less expensive than fixed and i think there is some historical data to support this (with all the caveats inherent to relying on historical data)

but that's a great idea for those unsure...take the variable and pay the fixed rate...pay more than what the bank is asking for?! yes.

and every time i've renewed, they keep telling me that i can switch over to fixed anytime from variable...there's probably some fine print to that, but then go and figure it out


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## Addy (Mar 12, 2010)

joncnca said:


> and every time i've renewed, they keep telling me that i can switch over to fixed anytime from variable...there's probably some fine print to that, but then go and figure it out



I've been told this as well, and have always been curious how it works. There must be some filing fees or admin fees or some sort of fees for switching from variable to fixed.


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## jamesbe (May 8, 2010)

Typically the switched to fixed is the posted rate, not a discounted rate. That's the gotcha. And typically the posted rate is much higher than what you could get fixed without even trying.


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## My Own Advisor (Sep 24, 2012)

That's something I need to find out when my mortgage renews this year:

1. cost to take fixed rate if I want to switch to fixed, and
2. what is the spread (between variable and fixed) when I do. The spread seems to be closing although it's rarely the discounted rate, it's the posted rate at the time.

3-year variable = 2.05%
3-year fixed = 2.34%

Would you guys go with 3-year variable or 5-year variable if you intend to pay off mortgage in about 5-7 years?


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## none (Jan 15, 2013)

I would take the one that is cheaper. At worst you invest the difference.


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## RBull (Jan 20, 2013)

My Own Advisor said:


> That's something I need to find out when my mortgage renews this year:
> 
> 1. cost to take fixed rate if I want to switch to fixed, and
> 2. what is the spread (between variable and fixed) when I do. The spread seems to be closing although it's rarely the discounted rate, it's the posted rate at the time.
> ...


2.79% or better for 5 yr fixed. Rates are not going down from here. Put the hammer down and be done!


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## My Own Advisor (Sep 24, 2012)

none said:


> I would take the one that is cheaper. At worst you invest the difference.


Considering exactly that none, thanks.

@RBull, duly noted


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## RBull (Jan 20, 2013)

My Own Advisor said:


> Considering exactly that none, thanks.
> 
> @RBull, duly noted


LOL, ignore me and do what you think is right. :biggrin:


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## cashinstinct (Apr 4, 2009)

Current mortgage penalty to break up would be around $4,000
Rate on current mortgage *3.09% *fixed, 2 years left

Rate available on variable mortgage: Prime - 0.85%, so bank prime 2.75% (2.85% - 0.10% given by banks on the 0.25% decrease) - 0.85% = *1.90% *variable rate

I would save around $5,000 in interests in 2 years (if bank prime stays at 2.75%), compared to penalty to be paid now $4,000 (or added to mortgage refinanced).

Would you do it?


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## MoreMiles (Apr 20, 2011)

cashinstinct said:


> Current mortgage penalty to break up would be around $4,000
> Rate on current mortgage *3.09% *fixed, 2 years left
> 
> Rate available on variable mortgage: Prime - 0.85%, so bank prime 2.75% (2.85% - 0.10% given by banks on the 0.25% decrease) - 0.85% = *1.90% *variable rate
> ...


No I would not. There is no guarantee the rate will stay this low so why pay a penalty for a big IF the bank prime stays at 2.75%


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