# Best rate for variable open?



## Plugging Along (Jan 3, 2011)

We'll be renewing one of our mortgages in the sumemr, and I'm starting to look for rates.

I have found they all seem to be the same posted at Prime + 0.8. What's the best rate (and where) have you seen it.

It HAS to be a Variable Open.

TIA


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## rookie (Mar 19, 2010)

i have been promised P-0.85 by rbc.


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## Jungle (Feb 17, 2010)

Open means you can pay it off anytime with no penalty?


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## Plugging Along (Jan 3, 2011)

rookie said:


> i have been promised P-0.85 by rbc.


I think that's for their closed... could you confirm that? There's NOBODY I can find for a Prime minus... that would be awesome


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## Plugging Along (Jan 3, 2011)

Jungle said:


> Open means you can pay it off anytime with no penalty?


Yes, its the one with the complete flexibility


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## jamesbe (May 8, 2010)

Why the requirement for open?

If you are paying off very soon, then the rate won't matter all that much. If you aren't planning on paying it off get a closed with a food rate. If you plan on moving, get a shorter 

Penalty should be 3 months interest, which at today's rates isn't much.


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## Plugging Along (Jan 3, 2011)

First we like the flexibility, and need the flexibility. Our plans will be to pay it off with in the term of the mortgage or sooner. Our incomes highly fluctuate, so having a max amount we can put in yearly doesn't always work for us. There may be some years where we don't put anything extra in, and others where we put in much more than what would normally be allowed. 

We plan to more than double the payments (which is max allowable on a fixed), but would rather not have an official shorter amortization. In the past, we have had to reduce our payments to the min for a short time, and still want that flexibility.

For me, an open variable is less risky than a closed variable for what we envision.


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## chantl01 (Mar 17, 2011)

*Open Variable is the way to go*

I can't speak to current offerings because I'm closing in on 3 years into the five-year term on my current mortgage. But it's at Scotiabank and it's a five-year variable open at prime -0.7. I pay off lump sums whenever I get a chunk of money set aside and I'm able to change my regular payment amount online anytime I like, with the change taking effect within a week. The flexibility can't be beat - and currently, neither can the rate!


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## kubatron (Jan 17, 2011)

If you have more than 20% down, or equity, prime+.25 from Laurentian Bank is available, fully open HELOC. PM me.


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## PF_Enthusiast (Jan 21, 2011)

2.25% (Prime -.75) - 5 year variable with ING, but you can only make annual payments of up to 25% of original mortgage amount.

http://www.ingdirect.ca/en/mortgages/index.html


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## Plugging Along (Jan 3, 2011)

The ING and Scotia ones are CLOSED variable... I need the open...

KUBATRON - I do have the equity... how do I pm someone.... I"m in AB, but my property is BC, does this matter?


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## Potato (Apr 3, 2009)

Do you really need the open if there's only a chance you'll pay it back? What are the odds? Is there a chance you'd need to move too, or just the paydown?

With the open, you pay more on the whole balance no matter what. If you go closed and do find yourself having a good year, if you max out your prepayment you can just bank it until the end of the term. And if you don't have a good year, your minimum payment is even lower.

Open: P+0.8 vs P-0.7 for a ~1.5% differential on the whole mortgage.

Closed: P-0.7 on the whole mortgage, but savings accounts at 1.5% today are about P-1.5, but if you figure a (high) 50% tax hit, that's 0.75, for an effective P-2.25, or a 1.55% differential vs the mortgage today. Can do slightly better with a GIC (e.g., if you get a 3-year closed, the first 2 years of excess savings can get locked up).


So a first-order approximation (back-of-the-envelope, ignoring amortization and the paydown, which gets close for long amortizations, but as close for short ones -- you can run these in a mortgage calculator yourself if you need more accuracy).

For the open: If you have $100k principal at 3.8%, you'd have $3.8k/yr in interest expense. If after the first year you had $50k to pay down, then in the 2nd year, only $1.9k of interest, and if the end of the 2nd year you had another $25k to pay down, $.95k for the 3rd year, for ~$6.65k interest total. If you didn't get lucky and didn't pay down any, it would be $11.4k in interest total over 3 years.

For the closed: If you have $100k principal at 2.3%, you'd have $2.3k/yr in interest expense. If after the first year you had $50k to pay down, then in the 2nd year, you still have only $2.3k of interest expense, but made (after tax 0.75%) $0.375k in interest income, for a net interest expense of $1.925k. And if the end of the 2nd year you had another $25k to pay down, again about $2.3k in interest expense, with $0.5625 in interest income, for net expense of $1.7375k the 3rd year. That's a total net (after-tax) ~$5.9625k interest expense total. If you didn't get lucky and didn't pay down any, it would be $6.9k/yr in interest. 

There are of course a lot of other scenarios, but it looks to me like with such a big differential between the open and closed rates, you're going to be better off with the closed rate, and just banking the difference (this gets even better for the closed if your tax rate is <50%, which it almost certainly is, and if you can get a higher rate of return on your savings, or if you can't save quite so aggressively, or if you can make some extra/prepayment on the closed). The exception would be if you can save even more than half the outstanding within the first year or two, in which case being able to pay it all down would make the open better -- but you say that that's uncertain, in which case I'd say go with the closed.

Edit: another way to think about it: if your first year of interest is $3.8k on the open, and $2.3k on the closed, then even if you could pay down the whole mortgage (or enough of it to make refinancing worthwhile), as long as that didn't happen until the end of the first year, you could pay the 3 months of interest penalty to break the mortgage and still come out ahead. It looks to me like you'd have to plan to pay off the mortgage within 5 months to make the premium for the open worthwhile.


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## Plugging Along (Jan 3, 2011)

It's probably not 'lucky' for us to pay off our mortgage in the next 5 years. The probably is more than 50%, but not gaurenteed to be a 100, (otherwise, I would already know exactly what to do). The ideal would be to pay it off in just over 2.5 years, that assumes my plan works out perfectly. Realistically, we're aiming for 3.5 years, there is also a very small chance it could be paid off in a year, but that's a long (<10% I would guess), so I don't really factor that in too much. The worst case, it could take much longer (like 15 years, if everything goes wrong). 

The probabilities would change based on other risks we have identified. My husband is self employeed, with an extremely employable skill set. He's aready been told that if he chooses, they need him for at least a few more years on this project. That's what I've based our projections on in terms of income. However, consultants are the first to go when things sour in the economy, so if that happens, that would throw our plans off. I've based our numbers on currently spending, so if there is nothing major over the next 3 years that I haven't planned for, then it should work. I'm usually pretty good at planning, however, there are just too many things out of our control, and for us, those things tend to have a very large impact. It's very feast or famine in our fields. 

In terms of your rough calculations, there is an intent to pay it off a large amount in the 2 years. In a closed variable, you don't have this option to pay such large amounts at any time. The terms are usually that you can pay up to a certain amount in the original principle, plus double on the payments or some percentage. If you miss one year, you can't carry it forward to the following. This is one of the drawbacks, and why we're willing to pay a premium to pay as much as we want at anytime. For us, there have been some lean years where we were not able to to put anything extra because of other things going on, and just made the regular payments for a few years until things settled, then we were able to make 30 - 40 percent on our principle. For us, it can be that much of a range. 

The only way around this is to amortize over a shorter amort of time for the closed. This for us reduces the flexibility, as I still plan to amortize our open for the full 15 years left. The required min payments would be less in the open option. Normally, this would not matter, as we always paid much more. Like I said before, it can be feast or famine, When we had it really tight, we reduced our mortgages to the bare minimum for almost a year, until things picked up and went back to normal. If we had our min payments doubled (or whatever the amount was), we would have had some major issues. With the open, I can plan for the worst, but hope for best.

With an open, I have found as the bank rate has been going up, the premium the charge sometimes decreases. If I find a better rate after, or the rate drops, I just call my bank and they lower my interest rate, no penalty or anything. This doesn't happen with the closed, you have to pay the 3 month penalty. I was actually stunned when I called one time to make an extra payment, they said that their open rate went down, and they would make the change for me. Also, if it gets really bad, and everything doesn't align, and the interest rates go crazy, then I can always lock in on a fixed rate without penalty. Not a likely thing, but after living the worst scenario we could imagine, I feel a little better doing that. 

You're posted some excellent information. Now, I'm wondering am I the only person on here that has an open variable or considering open variable?


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## FrugalTrader (Oct 13, 2008)

We signed up for a three year open variable mtg back in 2008 and it highly motivated us to pay off the mtg within the term - and we did! Perhaps another option would be to reduce the term? Maybe a 3 year closed discount variable? Or what about 1 year fixed?


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## Plugging Along (Jan 3, 2011)

Congrats in paying off your mortgage in 3 years! 

I haven't seen a discount for going with a shorter term. It didn 't seem at first glance that many banks offered it, and from the ones that I did find it with, the rate was the same. I only briefly looked into that, but I'll check that out more.

In terms of a 1 year fixed, the rate is somewhere right in the middle of the fixed and open variable, but it's missing the flexibility that I need.


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## FrugalTrader (Oct 13, 2008)

Is it possible to go with 1 yr fixed, then pay off a bunch of the principal at the end of the term, then renew with a lower balance? If so, then that may be a solution to your variable income.


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## Plugging Along (Jan 3, 2011)

I'll have to take a look into the one year, and find out more information. I'm even worried about losing the flexibility for the year. Since my spouses contract is up for renewal every 3-6 months, I'm always worried about locking into something. I'll see what kind of terms there will be. I hadn't considered it too much before, but I'll make some calls this week.


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## K-133 (Apr 30, 2010)

I got Prime -0.8 from Scotia plus the 15% annual lump sum + 15% payment increase + match any and every payments options. Really, that's a great deal of flexibility that you may be looking for, while still getting a great rate.

This is for a 5 year term. Run the numbers, you'll find with these options, you aren't losing a ton of interest over the term versus what you're looking to do.

I'm sure other banks can offer similar packages if you are particular to any institution.


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## rookie (Mar 19, 2010)

Plugging Along said:


> I think that's for their closed... could you confirm that? There's NOBODY I can find for a Prime minus... that would be awesome


am sorry didnt read correctly. what i have IS closed, not open


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## Plugging Along (Jan 3, 2011)

K-133 said:


> I got Prime -0.8 from Scotia plus the 15% annual lump sum + 15% payment increase + match any and every payments options. Really, that's a great deal of flexibility that you may be looking for, while still getting a great rate.
> 
> This is for a 5 year term. Run the numbers, you'll find with these options, you aren't losing a ton of interest over the term versus what you're looking to do.
> 
> I'm sure other banks can offer similar packages if you are particular to any institution.


It's still a CLOSED mortgage you're quoting, and its not enough flexibility for what I need. An open, I can pay as much or little (as long I make the amortization period) any time, as many times as I want. I know a closed is higher rate, but I really do need the flexibility based on our situation.


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## Plugging Along (Jan 3, 2011)

I just wanted to get a quick update, after all the advice I got from here, and that fact that I learned something new.

I was all set to get a Variable OPEN, as this has always been the best option for what I have wanted to do. However, my trusted broker, told me for the first time, he recommending variable closed, because of the large spread between the two. I have a little less flexibility, but with the repayment option, and determining my min/max payment amount, I think we have something that will still allow me to pay off my mortgage in a short term, but gives me the best rate. We’re amortized now over about 7 years, but I have plan that we will do it in 3, but in case something happens, I can extend it. The rate we were able to get was prime -0.85 so 2.15% right now. Thought I’d let everyone know.


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## Jon_Snow (May 20, 2009)

That's a great rate, PA - I'm paying 5.7% right now... 

Our mortgage term is up in 8 months... we were thinking of paying it off completely, but if rates are still low I'm tempted wring the best rate possible out of my bank and keep my cash savings intact (should be close to 300k by then) for any investment opportunities that come up...

My wife will certainly vote for killing the mortgage though...


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## Plugging Along (Jan 3, 2011)

With the rates so low, it is tempting to let it ride for a bit. I know we were planning to pay off our cabin mortgage in about two years. With such low rates, we're taking a combined approach by increasing our RRSP contributions instead, and putting a little more into the mortgage.


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## I'm Howard (Oct 13, 2010)

Jon, if you intend to Invest anyway, why not pay off the morgage, buy the Investments with Borrowed Money and write off the interest??

Common Shares are nothing but Borrowed Money, if Corporations can do it, why not Joe Average?


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