# Flipping to Fixed 2.99 % mortgage



## ions (Mar 23, 2012)

Dear Member.

I currently have a variable mortgage at Prime -0.8% = 2.2%. I was informed by my bank that I can change it to a 4 year fixed 2.99% for free if I wish.

It's strange to me why a bank would advise me to change to a product that will save me money but lose them money.

I just read an article today in the Toronto Start that BMO recommends going fixed if you have variable.

What do you think? 


Thanks


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## Jungle (Feb 17, 2010)

How much time do you have left on your term?

BMO is suggesting fixed over variable because the big discounts on variable are gone right now. Right now variable is more like prime "plus."


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## ions (Mar 23, 2012)

I have about 4 years left in the current mortgage contract.

Thanks for your feedback


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## albertGQ (Jun 11, 2011)

Depends on how much term you have remaining. If it's 2 or more, I'd stick with the variable.

The reason they want you to switch is because they'd make more off you if you took the fixed term. Prime minus 0.80% is pretty sweet.


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## doctrine (Sep 30, 2011)

I'd keep it if you have several years left. Even if interest rates rise 3% in 2 years, you will probably be able to get around 3% as you will see Prime - 1-2% start to come back.


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## ions (Mar 23, 2012)

*Reasoning behind your recommendations*

Thank you for your responses

I understand that the recommendation is to keep it and I will based on the responses. However, I am not following the logic. Please bare with me as I am probably missing some important piece of the puzzle.

1) Why would you expect banks to offer Prime – 2, if interest rates go up by 3 % in two years? Have they gone Prime – 2% in the past?

2) Also prime right now is 3 % and if interest rates go up 3 % in two years ( Prime = 6%) it would make sense to lock in at 2.99% for 4 years wouldn’t it? At the 2 year point if I get the Prime – 2%, I would be paying 4%.

3) Suppose in the fall interest rates go up by 0.5% , then I will be at 2.7% which still beats 2.99. But suppose next Spring 2013 they go up by another 0.5 % then I am at 3.2%. With this scenario I think I would be better to lock in for 4 years at 2.99% but you all recommended that I don’t lock in. Can you explain why?

I think I am missing something as I am new to mortgages and am not familiar with banks offerings and trends.

Thank you for your helping me understand the logic behind your recommendations.


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## OptsyEagle (Nov 29, 2009)

My guess and this is a guess, is that the BMO sees rates rising over the next year to 2 at the latest. Now keep in mind that rising rates do not make the bank anymore money. You may end up paying more on your variable rate mortgage but they in turn will pay out more on the deposit they took that provided you the mortgage.

What BMO sees, in my opinion, is that when interest rates go up, every variable rate mortgager scrambles to lock in a fixed rate. With the intense competition that arises at that time, there is a better then even chance BMO will lose that business. This way they lock it in for 4 years and you only have a week or so upon every renewal to make any changes.

So I suspect the offer is more to lock in the business then to increase their profits. If I were you I would take the deal, but then I never cared much for variable rate mortgages. I always preferred to fix my expenses and then knock the living daylights out of the obligation with big honking principle payments.


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## houska (Feb 6, 2010)

ions said:


> 1) Why would you expect banks to offer Prime – 2, if interest rates go up by 3 % in two years? Have they gone Prime – 2% in the past?
> 
> 2) Also prime right now is 3 % and if interest rates go up 3 % in two years ( Prime = 6%) it would make sense to lock in at 2.99% for 4 years wouldn’t it? At the 2 year point if I get the Prime – 2%, I would be paying 4%.
> 
> 3) Suppose in the fall interest rates go up by 0.5% , then I will be at 2.7% which still beats 2.99. But suppose next Spring 2013 they go up by another 0.5 % then I am at 3.2%. With this scenario I think I would be better to lock in for 4 years at 2.99% but you all recommended that I don’t lock in. Can you explain why?


I personally am not convinced that variable mortgages will be offered at better than P-0.75 to P-1. We got to P-0.8 or P-0.9 a while back with P=6%, and think it would take a significantly different funding environment for anything much better to be sustainable. So I view P-2 to be a longshot. (#1)

#3 - you have to consider the average rate you pay, not just where it ends up. So in your scenario your average rate for the 1st year would be 2.45% versus the 2.99% fixed. If rates went up to 3.2% *one year from now and stayed there*, you'd more or less be completely even. So it depends on your assumptions on how fast rates start increasing, and how far up they go.

Even though I'm a mathematician by training, I think it's possible to overanalyze this. P-0.8 is nearly as good as variable rates have ever been. 2.99 fixed is nearly as good as fixed rates have ever been. Both occurred in situations of market share grab. So I'd assume a sort of risk-neutral equivalency between the 2 of them. Therefore, I would ask whether you want to be a risk taker (where you're making the bet that the economy will be in the doldrums, keeping rates low) vs if you personally value budget stability. I think you have a win-win choice.


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## marina628 (Dec 14, 2010)

Just seen on news RBC is first to pull their 2.99% mortgage.


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## ions (Mar 23, 2012)

Thanks for all the comments.

I would still like to hear from the earlier posters about their logic why they would stick with the variable IF the contract term has > 2 more years.

When I originally posted the question my belief was that the longer the contract the more incentive to switch (for free) to fixed 2.99. If I had only 2 more years left I would definately not switch but I have 4 more years.

If interest rates go up by % 1 percent within the next 2 years then mathematically I should go for fixed 2.99%. NO?

Thanks


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## Spudd (Oct 11, 2011)

Most people believe interest rates will not go up within the next year or two. If they do go up, it likely won't be by 1%, since normally they raise the rates in 0.25% increments. 

The other thing to consider is that given the same size of monthly payment, more $ will go to principle now while your rate is low. This might be enough to counteract the increased rates later. 

The whole thing's really a crap shoot, you roll your dice and take your chances.


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## ions (Mar 23, 2012)

> The other thing to consider is that given the same size of monthly payment, more $ will go to principle now while your rate is low. This might be enough to counteract the increased rates later.


This is a good point Spudd. Thank you for your comment.


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## HaroldCrump (Jun 10, 2009)

Don't forget that variable rates compound monthly and fixed rates compound twice a year.


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## ions (Mar 23, 2012)

> Don't forget that variable rates compound monthly and fixed rates compound twice a year.


I have an idea of what variable rates compounding may be but I am not certain and I would like to understand it. What is variable rate compounding?

Also I read in the paper today that BMO's 2.99% is over tomorrow and the rest of the banks will follow.

Thank you.


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## cardhu (May 26, 2009)

HaroldCrump said:


> Don't forget that variable rates compound monthly and fixed rates compound twice a year.


Some do, and some don't. Over the years, I've had both kinds, but most of my VRM's were calculated twice yearly. 

IIRC (its been a while since I looked at mortgage fine print), the actual terminology on my mortgage papers was "calculated twice yearly, not in advance", as opposed to "compounded twice yearly" ... obviously, in a conventional term mortgage, there is no actual compounding taking place at all, whether monthly, twice-yearly, annually, or at any other frequency. 

ions ... its a method of calculating interest, a little complicated to explain, but if you google the phrase "calculated half-yearly, not in advance", you will find reams of reading material on it.


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## dcaron (Jul 23, 2009)

One very important thing to consider which no one has mentioned, is the penalty fees to pay off or exit your mortgage term ahead of its maturity. One has to pay a hefty IRD (Interest Rate Differential ) penalty fee to exit a fixed rate term, based on mortgage balance, and number of months before maturity. With a variable rate term, this penalty is 3 months interest.

If you're 150% sure you will not encounter a life event in the next 3,5,7,10 number of years, then a fixed rate term at today's record low rates is a great strategy. If you have uncertainty (possible salary loss, sickness, child birth, etc), a variable rate term might be better suited.

We signed for a 7-year fixed term @ 5.22% rate, $321,000 mortgage back in Feb 2008. Each time I asked my bank about the IRD penalty fee to break this mortgage, the fees were $20,000 +. The penalty will be reduced to 3 months interest in Feb 2013 as per Canadian law, because 5 years of my term has gone by. So Im praying the rates will be similar to what they are today, to allow me to renew with a better arrangement in 6 months (Feb 2013 - 120 days ).

All things considered, this might be the best time to lock in for fixed ....
_"Mortgage rates edge higher"_ ... http://www.moneyville.ca/article/1152173--mortgage-rates-edge-higher


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## ions (Mar 23, 2012)

Hi Dcaron, Thanks for your response but the switch is free for me (mentioned in the original post) as it is an option in my mortgage contract but your point is true if I were to exit the contract.

I decided to stay with the variable for now. I am generally a risk taker and the responses helped me come to that decision. One thing I still don't understand is why the first few posters insisted that if the contract is more than 2 years I should remain with variable. My logic tells me the shorter the contract the more incentive to stay with the variable as I expect the rates to go up in 2 years.

Anyways thank you for everyone's feedback much appreciated.


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## dcaron (Jul 23, 2009)

Take a look at this story - _"What if your mortgage rate went up 2 points"_
http://www.canada.com/news/world/What+your+mortgage+rate+went+points/6373794/story.html


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## ions (Mar 23, 2012)

Hi Thanks for all the feedback. I have another question.

Do the banks have a service where they send you an email if their Prime Rate goes up? My Mortgage is with TD right now.

I noticed that Bank of Canada Interest Rate announcements occur 8 times / year and I want to be updated by email either when the Bank of Canada Rate goes up or consequently the TD Prime rate.

Thank you


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## Oilers82 (Jan 17, 2011)

dcaron said:


> One very important thing to consider which no one has mentioned, is the penalty fees to pay off or exit your mortgage term ahead of its maturity. One has to pay a hefty IRD (Interest Rate Differential ) penalty fee to exit a fixed rate term, based on mortgage balance, and number of months before maturity. With a variable rate term, this penalty is 3 months interest.
> 
> If you're 150% sure you will not encounter a life event in the next 3,5,7,10 number of years, then a fixed rate term at today's record low rates is a great strategy. If you have uncertainty (possible salary loss, sickness, child birth, etc), a variable rate term might be better suited.
> 
> We signed for a 7-year fixed term @ 5.22% rate, $321,000 mortgage back in Feb 2008.


I would say that the general advice is opposite of what is posted here. If your life situation is pretty stable (ie your job is secure, you won't incur any unexpected expenses) you should probably roll the dice and go variable, assuming you can tolerate a bit of a rate increase with your current salary. It is generally shown that in the long run variable saves money over fixed. However, if you are afraid of potential salary loss, sickness (hence incurring long-term disability) or increased expenses like children, you'd want a fixed, predictable mortgage payment that you are sure will not have the possibility of increasing. You should base that payment of course allowing for the possibility of such an event occuring, ie borrowing less than what you're approved for or able to pay for at your current income. If your income really does decrease, the last thing you want is the uncertainty of your mortgage payment amounts to worry about.

Also sorry to hear dcaron that you chose fixed in 2008...that seemed to be a great time to pick up some very competitive variable rates. I bought in March 2008 and got prime - 0.5% (and I know there were others who got like prime -0.7 at the time). Obviously hindsight is 20/20 and there's no way of predicting what will happen from now on.

I think OP made the right call to stay at prime - 0.85 but to be honest 2.99 fixed is a pretty incredible rate. I was very tempted to switch to this myself back in February. Like someone else said, this was probably a win-win for OP, no real wrong answer here.


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## dcaron (Jul 23, 2009)

Oilers82 said:


> I would say that the general advice is opposite of what is posted here. If your life situation is pretty stable (ie your job is secure, you won't incur any unexpected expenses) you should probably roll the dice and go variable... if you are afraid of potential salary loss, sickness (hence incurring long-term disability) or increased expenses like children, you'd want a fixed, predictable mortgage payment ...


Be careful what you wish for - if you need to get out of a fixed mortgage due to your life situation, you will pay a hefty penalty ... One must choose the lenght of a fixed term, based on a very predictable life during the lenght of that term. You must not be forced to move, or thinking about selling your house for any reason. This is the point Im trying to make ...


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