# 2% variable vs 2.3% closed



## Flash (Nov 25, 2014)

I'd like to hear some options
2.0% variable 5 years (so p-0.70)
vs
2.3% closed 5 years

Planning to throw almost all my disposable income at the mortgage to aggressively pay it off.

Please tell me your reasoning why you would go what.

P.S House is not in the crazy market of GTA or GVA


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## noobs (Sep 27, 2015)

variable usually wins. either way most banks will let you lock the rates when it goes up, so enjoy your 2% and when it goes up to, lock it. Even if you break it it's 3 month of interest only. (try breaking a fixed rate lol)


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## 319905 (Mar 7, 2016)

2.3% closed ... rationale, rates should be going up and if so, my understanding, with the 2.0% variable, your payments will remain constant but as rates rise, more of the payment goes towards the interest and so less towards the principal. Renewing at 5 years, if you somehow aren't able to aggressively pay down the principal as planned e.g. some contingency, could be a bit of a shocker as in geez, all my payments went towards that rising interest :sour:


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## ian (Jun 18, 2016)

ditto on 2.3 closed for a long as possible. Historically low rates. Cut the amortization period down if you can, switch payments to mirror you pay (bi weekly, monthly). Get a clause added to your mortgage, if one is not there, that permits you to make an additional lump sun payment of X percent or increase your monthly payments by x amount,or both once every year.

Now is the time to take advantage of the low rates and make the biggest dent that you possibly can on the mortgage. At some point you will become financially immune to potential substantial increases in rates at renewal time.


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## Just a Guy (Mar 27, 2012)

Variable rates always outperform a fix rate in a flat or dropping interest rate market. In a rising interest rate, fixed could be better. 

All that being said, the interest rate isn't the part of the mortgage you should be concerned about. You want to look at the limits on extra payments, and some of the other clauses since you are interested in an aggressive paydown. Changing your payments, prepayment amounts, prepayment times, those are the issues you should worry about.


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

Assuming you already have chosen the best mortgage product and it comes down strictly to rate - variable all the way! 

You cannot time the market. So the rational of locking in now; historic low; protect yourself; shelter yourself from a hike - all bull$#!%. Talk to someone who was told that same rational 5 years ago - rates were in the vicinity of 3%.

Historic data proves that variable has been the winner. Remember, your mortgage does not last 5 years so you cannot deflect rate hikes, if and when they happen. You will get hit one way or another. If they go down, well then you benefit - like what is happening now. 

Stick with what is certain - which are the rates you see before your eyes. On your variable, you know for sure you'll be paying 2%. On a fixed, you know for sure you'll be paying more.

Penalty is another consideration. Variables only pay 3 months interest where a fixed rate will be IRD - much higher. If your with a bank, their penalty calculations on fixed rates is horrendous. You may not be thinking about breaking your mortgage but you should know that the majority of mortgages are broken within the first half of their terms.


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## Ihatetaxes (May 5, 2010)

Always went variable open and put lump payments whenever I had extra cash. Today I might go 5 year fixed that rate is great, WAY better than anything I ever had until my mortgage was paid off 6 years ago.


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## mordko (Jan 23, 2016)

What Mortgage u/w said +1. 

One exception - if a 2% rise would really hurt your level of life then the insurance provided by a fixed rate could be worth it.


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## Eclectic12 (Oct 20, 2010)

Mortgage u/w said:


> Assuming you already have chosen the best mortgage product and it comes down strictly to rate - variable all the way!
> You cannot time the market ... Historic data proves that variable has been the winner.
> 
> Remember, your *mortgage does not last 5 years so you cannot deflect rate hikes, if and when they happen* ...


Have had people talk about examples either way so I can understand all but the bold text part. 

I don't see why anyone would be break their mortgage if rates are higher than the mortgage rate being paid so I am curious as to what prevents the rate deflection?


Cheers


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## Nerd Investor (Nov 3, 2015)

I'm usually variable all the way, but in this environment and with a tight spread (0.3% isn't much) I might lean towards fixed. 
Aside from the risk the bank of Canada raises the overnight rate, we've already seen shenanigans from TD this year where they raise their "mortgage prime rate" to 2.85%, so something like that is always a risk as well.


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## CalgaryPotato (Mar 7, 2015)

Nerd Investor said:


> I'm usually variable all the way, but in this environment and with a tight spread (0.3% isn't much) I might lean towards fixed.
> Aside from the risk the bank of Canada raises the overnight rate, we've already seen shenanigans from TD this year where they raise their "mortgage prime rate" to 2.85%, so something like that is always a risk as well.


I feel the same as this. I know over time variable rate mortgages are better, but that is like saying overtime GICs provide a solid return. You have to look at the reality that mortgage rates can't go much lower, but have potential to go much higher. If it was a bigger spread it would make a difference, but it would be really hard to turn down that low of a fixed.

As for the comments about most people breaking out of mortgages, I don't know what the reference point for that is, but I'm guessing it was the period where rates were falling from high rates to low rates to the point where it made sense to pay the penalty and start anew. Clearly not the situation now.


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

To answer the questions about breaking mortgages: People break their mortgage all the time and not necessarily for a better rate. Odds are against you: death, divorce, upgrade, renos, loss of job/income, debt management. We all like to think we are invincible or have our future planned out - but no one plans for the examples I mentioned. So when you are forced to break a 'well planned' fixed rate mortgage, you will regret you did not choose the variable. 

Fixed rates are much more profitable for the banks. And the 'economists' who work for the banks do a great job at promoting this.


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## Flash (Nov 25, 2014)

Thank you all for the replies. Good considerations.

To answer a few questions, as I mentioned I plan to aggressively pay off the mortgage. I have the standard 20% annual extra payments of the total mortgage. I can also pay in as many increments as I wish as long as I don't go over the 20% yearly limit. So another "pro" of the lower variable is that the interest hurts the most at the beginning when the mortgage is the biggest.

I am with a big bank (scotia) so yes, terminating a fixed would also hurt considerably more. And a rise in interest would not hurt my ability to pay. Like I mentioned, I plan to aggressively pay off the mortgage, by almost double the regular monthly payments (so 3x). Only thing that would hurt by interest rates rising is me knowing I'm wasting money on a higher interest rate when I could've locked into a 2.3%. Hence why I want to try to pay the least amount of interest. Of course, no crystal ball available 

Also good point banks can increase their "prime" as they see fit. When BOC lowered the prime to 0.5 from 1.0, banks only went down 0.3, so only 2.7 instead of 2.5. Last concern I have with variable is the crazy increase that can happen (and decrease, but we are already very low, don't think a crazy decrease would still happen).

Was watching the history: https://www.ratehub.ca/prime-rate

Just some dates with crazy increases: 2005-08-31 4.25% up to 6% in 9 months
or 1997-08-31 4.75% up to 6.5%, this time only 4-5 months.

I was trying to see some inflation history numbers as I know that is the biggest drive to increase or decrease the prime rate. And I can't just shake the obvious only 0.3% difference. One rate increase and I'm where the fixed is. 2nd rate increase and I already lost. I usually saw 0.5% difference, so 2 rate increases and it's even.

Another question: Why exactly did the rate do drop in 2015? Inflation went even lower?


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

Flash said:


> Also good point banks can increase their "prime" as they see fit. When BOC lowered the prime to 0.5 from 1.0, banks only went down 0.3, so only 2.7 instead of 2.5. Last concern I have with variable is the crazy increase that can happen (and decrease, but we are already very low, don't think a crazy decrease would still happen).
> 
> Was watching the history: https://www.ratehub.ca/prime-rate
> 
> ...


I wouldn't rely too much on ratehub. If you want accurate figures, go to bankofcanada.ca in the rates section.

There is no easy answer for your question in regards to the rate drop in 2015. Essentially, it was a move to stabilize the economy. Very vague answer but that's as specific as I can get. There are lots of variables which affect that decision and you would need an economist degree just to understand it all. Everyone has their theories - but thats all they are; theories. Bottom line, you cannot time the market or know where it is heading. You can only speculate. My speculation is that rates will remain low for much longer. I consider <5% low. I consider <3% abnormally low. Some people can't sleep with a rate hike. Some can. 

I view the choice of variable vs fixed is like choosing to buy a stock in one lump sum or making systematic contributions. The lump sum is similar to a fixed rate. Your book value is fixed. You may have gotten it at a low or at a high. You won't know. The systematic contributions is similar to a variable rate. You take advantage of the ups and downs keeping your book value relatively flat.


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## Flash (Nov 25, 2014)

Mortgage u/w said:


> I view the choice of variable vs fixed is like choosing to buy a stock in one lump sum or making systematic contributions. The lump sum is similar to a fixed rate. Your book value is fixed. You may have gotten it at a low or at a high. You won't know. The systematic contributions is similar to a variable rate. You take advantage of the ups and downs keeping your book value relatively flat.


Good analogy. I also remember I read something exactly about that (was it couch potato?, anyway found another at http://www.theglobeandmail.com/glob...t-averaging-the-nitty-gritty/article20707395/). Anyway, they were saying that someone buying lump sum will generally be ahead of someone who is dollar cost averaging, no matter when they entered the market. I think it was something to do that overall, stocks will increase, hence buying early will give a better return. That can't really be said about interest rates.


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## RussT (Jul 11, 2016)

I would go variable. If the interest rate increases slowly over the 5 year term to say 4% (and you don't lock in at some point), your average rate will be around 3% which is not disastrous. Since the variable rate gives some other benefits I think it is a wash.


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## Nerd Investor (Nov 3, 2015)

I guess another thought is, if you're paying down the mortgage aggressively as you've stated, the lowest possible rate now tends to make more sense. That is to say, by the time a rate hike might occur, if you've but a nice dent in the mortgage the savings you've "banked" by getting a lower rate on a higher average balance likely more than offset a hike even it takes you above 2.3%.


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## Eclectic12 (Oct 20, 2010)

Mortgage u/w said:


> To answer the questions about breaking mortgages: People break their mortgage all the time and not necessarily for a better rate. Odds are against you: death, divorce, upgrade, renos, loss of job/income, debt management. We all like to think we are invincible or have our future planned out - but no one plans for the examples I mentioned ...


Perhaps this should be "fewer plan for the examples"?

In my case, I made sure that death = mortgage paid off, wasn't married when I had a mortgage so it wasn't an issue, upgrades/renos were paid for in cash, loss of job/income would have been covered by renter income/savings and the mortgage plus a car loan were the only debts (mortgage discount was being applied to the principal so that change of job would not affect payments).

I seem to have beat the odds as the only mortgage I broke was for a better rate.


Cheers


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

Eclectic12 said:


> Perhaps this should be "fewer plan for the examples"?
> 
> In my case, I made sure that death = mortgage paid off, wasn't married when I had a mortgage so it wasn't an issue, upgrades/renos were paid for in cash, loss of job/income would have been covered by renter income/savings and the mortgage plus a car loan were the only debts (mortgage discount was being applied to the principal so that change of job would not affect payments).
> 
> ...


I would say you are in the minority because the stats show otherwise (at least the ones I've seen).
Lenders depend on the majority that do break their mortgages. Especially the banks - they post ridiculous rates for that sole purpose.


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