# Variable rate or RBC Ratecapper?



## Liz (May 31, 2009)

Hi everyone,

First off, thanks in advance for any advice!

The situation is that my partner and I are planning to purchase for the first time (exciting!). We are looking at a $220,000 purchase with a 20% ($44000) downpayment. 

So we are now of course doing the 'type of mortgage' debate. We are both rational and quite comfortable in taking calculated risks. Plus, we are very diligent savers, keep a close eye on our money and are good at saving for 'worst case scenarios', so I believe we are perfectly suited for a variable rate: IF we believe that it has the highest expected return (recognizing that hindsight might prove otherwise). The difference between fixed and variable right now seems quite large (1.75 - 4.5), plus we can absorb the shock of interest rates going up to 13% in the next 5 years without changing our lifestyle (we can actually handle a higher rate, but that's where I stopped my calculations). With the current variable rate, we'd be starting at biweekly payments of $360, which is well below what we can afford, so our plan is to put all the extra money into a) savings for future rate hikes b) straight into the mortgage or c) combination of a and b. 

BUT interest rates might start increasing such that the variable rate comes out a loser in the end (like it did in the mid-late 80s). So I started looking at other options, and I noticed that RBC has a new product called the RateCapper mortgage, where you are variable at prime (currently 2.25), and you float at prime, unless prime hits 5.5%, in which case you will stay at 5.5% unless/until prime comes back down below 5.5%.

So I'm wondering what you wonderful personal finance people would suggest for this situation: go for pure variable, or go for a bit of safety with the RateCapper.

Thanks again!


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## HaroldCrump (Jun 10, 2009)

In other words, RBC is asking for 50 bps higher interest (2.25 - 1.75) in return for the insurance protection at 5.5% prime.
You will be paying 0.5% more than everyone else who went pure variable, until prime hits 5.5%.
Which it may not during your term (assume 5 years).
It is really upto you whether this "insurance" is worth the extra 0.5% to you or not.

Personally, if you have some buffer and flexibility with your finances (as you say you do), I'd go pure variable.


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## Berubeland (Sep 6, 2009)

I just want to congratulate you on your new house !

I also want to tell you how impressed i am that you guys went for the frugal choice of buying a house well with your means rather than a so called "dream house" 

Let's start a revolution


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## Liz (May 31, 2009)

Forgot to mention: another issue with RBC is that we are pre-approved for a number of mortgages through a broker right now. But I think he said that RBC doesn't deal with mortgage brokers, so we would have to get approved by RBC ourselves in the next week.


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## jamesbe (May 8, 2010)

I'd go pure variable (and I did) but pay down the mortgage at your calculated fixed rate.

IE: if fixed rate is 5% right now, get the mortgage at 1.75% variable but keep your payments at the 5% rate. BMO let me do this and will not raise / lower my payments as the rates change. I like this because it is a forced savings plan with the stability of knowing my payment won't change.

I signed originally at 5.9% then lucky for me the rates dropped and I now pay 1.65% on a variable. But I still pay at the 5.9% fixed rate I originally signed at. Anytime I do a mortgage calculation with a banker they think I am paying WAY too much but it's fine by me, 90% of my payment goes to principal!


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## leafsfan (Jul 8, 2009)

Liz..you may want to read this post by canadian mortgage trends. Pretty good analysis of this mortgage.
http://www.canadianmortgagetrends.c...ends/2010/05/the-rbc-ratecapper-mortgage.html


Also i'm not sure but i think RBC does deal with brokers... but maybe just not your broker. you may want to ask. I think it is BMO that does not use brokers.


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## Four Pillars (Apr 5, 2009)

Great article Leafs Fan. Rob makes the great point that if you are worried about rate increases then get a fixed. 

Otherwise get a normal variable mortgage.


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## Liz (May 31, 2009)

leafsfan said:


> Liz..you may want to read this post by canadian mortgage trends. Pretty good analysis of this mortgage.
> http://www.canadianmortgagetrends.c...ends/2010/05/the-rbc-ratecapper-mortgage.html


That's a great article, thanks for passing it along. It's particularly helpful for pointing out the average prime rates over the past years -- this is something I hadn't seen during my research.



> Also i'm not sure but i think RBC does deal with brokers... but maybe just not your broker. you may want to ask. I think it is BMO that does not use brokers.


This could be true, but in the comments someone noted _"You can see why RBC does not use Mortgage Brokers."_ so maybe they stopped (or started) at some point.


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## ghostryder (Apr 5, 2009)

HaroldCrump said:


> In other words, RBC is asking for 50 bps higher interest (2.25 - 1.75) in return for the insurance protection at 5.5% prime.
> You will be paying 0.5% more than everyone else who went pure variable, until prime hits 5.5%.
> Which it may not during your term (assume 5 years).
> It is really upto you whether this "insurance" is worth the extra 0.5% to you or not.
> ...



Of course you are assuming that you can't get a lower "starting rate" on the RateCapper. If you can get a rate that is closer to, or the same as you would get from a "plain" variable, and still get the "insurance" of the cap, then wouldn't the Ratecapper be just as good (or better) than a plain variable?


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