# Ahhhh help me decide. fixed vs. variable rate mortgage



## apom (Mar 10, 2011)

Hi I need to make a decision soon and would like more information from reputable sources before deciding. I need to borrow approx $303,000. From what I have read variable rates traditionally outperform fixed rate mortgages but based on our current situation it's hard to say if this will be the case. 

Fixed rate 5 years is 3.86 approx $1400-$1450 per month. I can handle an extra few hundred if needed. Approx cost of borrowing for 5 years is $55k

Variable rate. 3 years at prime - .95 or 5 years at prime - .85. $1142 per month. I can also add money to top it up per month. cost of borrowing would be approx 30k *if* prime stays at 3%. 

What would you recommend?

Please consider all possible variables and there causes. (inflation, oil prices, cdn dollar, etc..) I'm pulling my hair out trying to decide. On one hand the potential savings are very appealing on the other hand if prime starts creeping up to 5-6 I might be worse off.


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## MikeT (Feb 16, 2010)

Lets look at the worst possible cases.

The worst you can do by choosing fixed is about 25k loss.

The worst you can do by choosing variable is losing your house.

Now the best cases:

The best you can do by choosing variable is saving 25k.

The best you can do by choosing fixed is saving an unlimited amount.


Those are the outcomes if you assume interest rates might go to 20% like the 1980's. More likely we are going to see them rise to 5 or 6 percent. Choosing variable usually saves people money because we rarely see extremes. 

However, you seem like the worrying type. If you are having difficulty sleeping with this decision, imagine how you'd feel with a variable rate worrying about it for 5 years. Why not just get a fixed rate and sleep better for the next half decade?


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## Plugging Along (Jan 3, 2011)

In 5 years, I don't think the rates will go up 20%, however, how much will it go up will be anyones guess. That's why fixed rates are lower risks in terms of volitility.

Yes, historical rates, variable has always been lower (with the exception of a few short periods). However, prime is at an historical low, so there's really not a lot of place to go, except up.

For me, we always go with an variable open, and that gives us the opportunity to lock in at anytime, if things are getting bad, and more flexibility. However, the rate is not as good as a variable closed. 

I think as Mike said, if you're not up for the risk, or cannot handle the variability of rates, then you may want to consider the fixed.


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## Xoron (Jun 22, 2010)

What about a 1 year fixed term? My bank will only allow me to get a 5 year variable (which I wasn't comfortable with). A 1 year fixed lets you lock in to a low rate for a year, and you can always lock in for a longer fixed term on renewal. 

My last renewal was for 2.4% for 1 year (in August 2010). Previous to that, I had a 5 year fixed at 4.4%.


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## donaldhumiston (Apr 26, 2011)

Not bad to have a variable mortgage I guess. How I see it, you start off with high payments then gets to lower in time when it's almost to end. Seems it only matches your income as you grow older (I guess?).


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## m3s (Apr 3, 2010)

Just look at all the people paying $10k+ penalties to get out of their fixed rates

The banks are laughing either way


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## Xoron (Jun 22, 2010)

mode3sour said:


> Just look at all the people paying $10k+ penalties to get out of their fixed rates
> 
> The banks are laughing either way


That's why I like the 1 year fixed. Only have to wait 1 year for renewal, and you get a rate that's excellent, almost as good as the variable rate without the lock in.


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## apom (Mar 10, 2011)

Yea your right I would not be able to sleep if interest rates jumped high. But I don't like spending extra money either. I just want the optimal situation. At this point is a variable worth the risk? 300k is a lot of money to me. 2% jump is $6k a year in interest. 

1 Year is to little. I want 3 years minimum. This is my first time shopping for a mortgage and it's definitely not fun.

I am running simulations but it's really tough to forecast prime. If prime stays at 3 for 2 years and then gradually increases to 5 for the remaining 3 I save quite a bit of money.


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## jamesbe (May 8, 2010)

Xoron said:


> That's why I like the 1 year fixed. Only have to wait 1 year for renewal, and you get a rate that's excellent, almost as good as the variable rate without the lock in.


But if the rates climb at years end and you renew, you are going to get hosed then.

So what did that get you really? You lost the savings while the rate was low and now you have to pay the higher rate upon renewal.

If you are going to lock in get 3years or 5 years for peace of mind otherwise you aren't doing anything but postponing the inevitable for a very short period of time.


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## Ihatetaxes (May 5, 2010)

I have always gone 5 year variable open. Low rates and flexibility of lump payments whenever you want. Its worked for me, especially the last few years and now my mortgage is paid off. If I were to buy another property in the future I will for sure do the same.


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## Xoron (Jun 22, 2010)

jamesbe said:


> But if the rates climb at years end and you renew, you are going to get hosed then.
> 
> So what did that get you really? You lost the savings while the rate was low and now you have to pay the higher rate upon renewal.
> 
> If you are going to lock in get 3years or 5 years for peace of mind otherwise you aren't doing anything but postponing the inevitable for a very short period of time.


Hosed anymore than someone with a variable rate mortgage? Not really, what I'm getting is a slightly higher rate (over variable), with a short renewal term. 

As for a longer term mortgage: I'm not willing to pay the premium (1.0%-1.5%) for the peace of mind. As well, if I want to get out of my mortgage early, the fees are outrageous.


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## larry81 (Nov 22, 2010)

variable without a doubt


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## Echo (Apr 1, 2011)

I'd go with the variable (3 years at prime minus .95 is a terrific rate!), but increase your monthly payments as if you were paying the fixed rate. 

The early years of the mortgage are definitely a good time for accelerating principle payments and can save you thousands in interest over the life of your mortgage.

Interest rates would have to rise over 180 points to equal the fixed rate you were quoted. Not that it can't happen, but the question is how long will it take for interest rates to get there?


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## jamesbe (May 8, 2010)

Xoron said:


> Hosed anymore than someone with a variable rate mortgage? Not really, what I'm getting is a slightly higher rate (over variable), with a short renewal term.
> 
> As for a longer term mortgage: I'm not willing to pay the premium (1.0%-1.5%) for the peace of mind. As well, if I want to get out of my mortgage early, the fees are outrageous.


Yes you are hosed more because Variable is prime minus right now, then the time factor. One year just doesn't make sense to me to lock in.

Take the variable but make payments based on the fixed rate. If your bank is worth it's salt they will not up your payments. I've had the same payments on variable for 5 years, rates go up rates go down, my payment stays the same, in good times I destroy the principle in bad times not so much. But I chose my payments based on the 5 year fixed (at the time 6%) but am paying 2.15% do the math on that, I reduced my amortization by 10 years in about 3!


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## andrewf (Mar 1, 2010)

Echo said:


> I'd go with the variable (3 years at prime minus .95 is a terrific rate!), but increase your monthly payments as if you were paying the fixed rate.
> 
> The early years of the mortgage are definitely a good time for accelerating principle payments and can save you thousands in interest over the life of your mortgage.
> 
> Interest rates would have to rise over 180 points to equal the fixed rate you were quoted. Not that it can't happen, but the question is how long will it take for interest rates to get there?


And since it will take some time to rise, rates will need to increase by around twice that for the effective rate of interest averaged over the term to equal the fixed rate. If rates don't rise by 3.6%, then you're probably better off with the variable.


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## Syph007 (May 2, 2011)

Variable always. I cringe when i hear the money people on the news tell everyone to lock in now!!! All lenders Ive checked with in southern ontario are still offering subprime variable. I'm at a sub prime right now(-0.6%, so I'm paying 2.4% right now) My friend just locked in for 5 yrs at 6%, and that just seems crazy to me. Show me a chunk of 5 yr historical data were 5 yrs fixed paid less than 5 yr variable....

I suppose the only argument for fixed is if your budget cant account for volatility at all.. like if your payment went up 100 bucks a month you wouldnt be able to eat... but then you may be in a house you cant afford.


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## v_tofu (Apr 16, 2009)

I'd go with fix.

I wouldn't be surprised if the BOC raised interest rates to up to %10 within the next decade.


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## marina628 (Dec 14, 2010)

I took a 5 year fixed 3.49% back in October because we have only 7 years to pay our house off.Prior to this renewal we have been on variable for about 10 years.I guess it really depends on your situation ,for me if we see crazy interest rates in 2015 ,I am able to pay off the balance.


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## datasunny (May 2, 2011)

OP, could u let me know where did u got P - 0.95 for 3 year variable? Thanks.


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## andrewf (Mar 1, 2010)

If the overnight rate is at 10% within the decade, we're probably going to be in for a world of hurt besides. Your house is going to lose 40% of its value--sell and rent now.


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## kaldyra (Mar 27, 2011)

andrewf said:


> And since it will take some time to rise, rates will need to increase by around twice that for the effective rate of interest averaged over the term to equal the fixed rate. If rates don't rise by 3.6%, then you're probably better off with the variable.


+1 to that. andrew has the point.

High/low rate is not the factor to decide to go with fixed or variables, it is *how fast* the rate will jump in the next few years.

And in the worst case, you can still switch to fixed rate anytime anyway - it is not like rate will be increased by 5% in one day. If you worry, let's do variable open so that you can always change your mind.


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## apom (Mar 10, 2011)

datasunny said:


> OP, could u let me know where did u got P - 0.95 for 3 year variable? Thanks.


That was from last week. I am told rates have tightened up but I will check. 3.86% for 5 year fixed is still being offered.

Variable is approx $1100 per month, fixed is $1400 per month. Were comfortable with both. Even paying $1600-$1700 a month on the variable shouldn't be a problem. The main concern is prime tho. My dad lived through the housing crash in the late 80s and early 90s. He remembers the huge jump in rates and the people that lost there houses. 

+ prime is at historically low point. I can't see it staying around 3 for the next 3 years. There is no way. It's bound to go up. The question is by how much.


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## apom (Mar 10, 2011)

How does this forecast of prime look like? 

year 1 3.25
year 2 3.75
year 3 3.75
Year 4 4.00
year 5. 4.5

If prime follows that pattern and I increase the payment to what I would be paying on a fixed rate payment I would have about $12,600 less owing with the variable mortgage. I would probably only do the 3 year and then reassess.


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## Financial Cents (Jul 22, 2010)

Seems quite reasonable to me apom. I can see 50 basis points in 2011 and 50 basis points in 2012-2013.

We're doing a fixed rate for 5 years, 4.5 years to go @ 3.4%. I think any 5-year fixed under 3.75% is worth considering.


My Own Advisor


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## apom (Mar 10, 2011)

Still playing with the numbers. Fixed rate mortgage rates have dropped. I'm now looking at 3 year fixed for 3.49% or 3.3% if its high ratio.


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## canadianbanks (Jun 5, 2009)

MikeT said:


> However, you seem like the worrying type. If you are having difficulty sleeping with this decision, imagine how you'd feel with a variable rate worrying about it for 5 years. Why not just get a fixed rate and sleep better for the next half decade?


I second that. If you won't be able to sleep (just to save a couple of hundred a month) then go with fixed rate.


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## Larry6417 (Jan 27, 2010)

canadianbanks said:


> I second that. If you won't be able to sleep (just to save a couple of hundred a month) then go with fixed rate.


I'm going to disagree with the above. The OP has said he has the capacity to carry a larger monthly payment if need be. The fixed rate will cost him an extra ~$250 - $300 per month or an extra $3000-$3600 per year *after tax*. That's an awfully high premium for certainty. How much sleep will he lose then?

The OP could lose if interest rates rose rapidly, but how likely is that given anemic economic growth? Interest rates will rise - they have to given the historic lows - but I doubt they'll rise quickly.

I look at the premium on fixed mortgage rates as "insurance" against loss from interest rates rising rapidly. The question is: does the OP need this insurance? The event he would be insuring against is unlikely. Also, the outcome if interest rates rose quickly is not catastrophic for him.

My suggestion: take the variable mortgage rate. Save the difference (cost of fixed rate minus variable rate). At regular intervals you can then pay down the principal and give yourself breathing room if rates do rise quickly. If not, then you pay your mortgage even more quickly.


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## Sustainable PF (Nov 5, 2010)

Financial Cents said:


> I think any 5-year fixed under 3.75% is worth considering.


agreed


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## dilbert789 (Apr 20, 2010)

What do you guys think of the Scotiabank 'Save Now, Save Later' mortgage?
1 yr fixed + optional 5yr fixed on renewal with a guaranteed discount.

1.66% off the posted rate for the 1-year term. A guaranteed interest rate discount of 1.25% upon renewal to a 5-year fixed rate, closed-term mortgage.

Even if you don't take the 5yr renewal it gives you 1yr at 2.64%.


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## Echo (Apr 1, 2011)

2.64% looks to be the best rate in the country for a 1 year fixed. I personally like the variable rate if you can get the discount at prime minus .75 or higher, but I don't see any downside to taking a deal like this.


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## dilbert789 (Apr 20, 2010)

Echo said:


> 2.64% looks to be the best rate in the country for a 1 year fixed. I personally like the variable rate if you can get the discount at prime minus .75 or higher, but I don't see any downside to taking a deal like this.


That's what I was thinking, even if you aren't planning on taking the fixed it seems like a pretty good deal. At least it lets you post pone the decision a year.

I have to say I'm a bit surprised that nobody has jumped on him for saying he's taking out a 300k mortgage on his first home. Normally people are quick to say you're crazy for doing that on your first house!


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## Four Pillars (Apr 5, 2009)

dilbert789 said:


> I have to say I'm a bit surprised that nobody has jumped on him for saying he's taking out a 300k mortgage on his first home. Normally people are quick to say you're crazy for doing that on your first house!


He didn't ask about the amount he was borrowing - just about the mortgage terms.

Mortgage size is relative - $300k would be financial suicide for some and pocket change for others.


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