# Mortgage rate...thoughts?



## financeguru (Jan 18, 2010)

Hi everyone
I'm in the market for a mortgage, bought a new house that is closing in 3 months. I am looking at variable mortgages and was refered to this website in my research: 
http://www.ratebot.ca/lowestrates.php
It has several no name companies selling mortgages e.g. valueland mortgages which is offering a 3 yr closed at 1.85% and truenorth which is offering a 2.1% rate on a 4 year variable closed. These beat what is being offered by the large FIs by a good .3-.4% so very attractive for me. My question is how trustworthy are these companies? Since i've always gone to the big banks for my mortgage, i'm concerned if i can depend on them...are there any risks of going with small companies such as these? What are the potential downsides, if any?


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## MoneyMaker (Jun 1, 2009)

valueland is a pretty well known company.. you should check out the "mortgage rates" thread on redflagdeal's personal finance section..


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## Oldroe (Sep 18, 2009)

You need to ask for a better rate at the major banks. They will not offer it? Everybody can get .5% reduction.


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## Dana (Nov 17, 2009)

Oldroe said:


> You need to ask for a better rate at the major banks.


Agreed. The big banks know what the mortgage companies are offering and if you pit them against eachother, the big banks will usually match rates for you. 

If you are worried that these mortgage companies will go under, don't worry. If it does happen your terms and conditions stay the same for the remainder of the term of your mortgage, you will just make payments to whichever financial institution takes over your mortgage business. 

Mortgages are federally legislated in Canada (i.e. how interest is calculated and applied) and is consistent from lender to lender. 

Out of curiosity, why variable vs. fixed rate?


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## Shayne (Apr 3, 2009)

Dana said:


> Agreed. The big banks know what the mortgage companies are offering and if you pit them against eachother, the big banks will usually match rates for you.


Although this does happen, it doesn't happen as much as you would think. I have had several clients take my rate back to their banks and the bank refused to match it, never mind beat it. 

I don't mind this one bit.


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## Oldroe (Sep 18, 2009)

So after you negotiate the best rate keep your payment at the advertised rate, this will get you 1 exacter payment per year (approx).

The best negotiated rate for me was .93 off the advertised rate and it's all based on credit rating and cash. At the time I had twice the money in that bank in cash to pay the mortgage. 

And also make it clear you will get up and walk.

I will find a site that will give you all mortgage rates for banks credit unions ect. next week.


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## financeguru (Jan 18, 2010)

Dana said:


> Out of curiosity, why variable vs. fixed rate?


Dana,
I have always got a variable mortgage and found always making less as compared to a fixed mortgage. I believe there are studies out there that prove unequivocally that variable mortgages beat fixed mortgages 9 out of 10. I am going to go variable for the following reasons:

i. People who are saying one should go for a fixed mortgage (which represent 80% of canadian consumers as per the globeandmail) are overestimating how quickly the economy is going to grow. Fact is that U.S unemployment is hovering at 10% and the u.s consumer is deleveraging to a huge degree which means consumer spending that drives 2/3rd of economic activity is going to remain slow for the next while at least. So i see a protracted period of low interest rates. I also don't think that the canadian economy is deleveraged from the u.s enough that we will remain immune to what is happening in the states.
ii. People who are trying to choose between a fixed and variable are in a way trying to time the market...i think if you stick to variable over the life of your mortgage (25 years), you are going to make money no matter what. This is the same logic as investing in stocks...i don't know what is going to happen to the interest rates in the immediate future and how fast they are going to go up but i do know that in the long term a variable is better than a fix rate
iii. I don't believe that i can outstmart the banks, fixed policies are kind of an insurance premium paid to the banks for the peace of mind that comes from paying a fixed amount. In other words banks are convinced that at the fixed rates they are offering they are going to make money at the cost of the consumer, why should i willingly give this to them. 
iv. My personal circumstances are such that i can go with the volatility that comes with a variable mortgage. I am relatively young 33, have a stable income which would probably classify as a high earner. My wife works for the provincial government, so there is an additional level of security with that. So i believe i can afford to take risks. Last year ,we saved about $35000 and have no credit card debt or car debt. This year i think i'm probably going to save a lot less - $12000 perhaps, but thats pretty good considering we are buying a new home which will cost me about $75000 (40K down +35K upgrades, taxes, land transfer etc.). We will do this without using equity in our condo (60K less 30K, used on the smith manouevre and which we plan on renting out in May).
v. From a cash flow perspective i want to put everything into the stock market and a variable mortgage currently affords me the best possibility to do that. I am stock market bull, and believe we are roughly 50% of where i think we should be in the next 2-3 years. I see the stock market at 13000 - 13500 within the next 2 years, which is about a 18%-20% gain from here on. This is still an unprecedented opportunity for those who can stay invested and focused and not get dissuaded from the ups and downs. If the market falls, i invest more aggressively.

There you go!


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## cardhu (May 26, 2009)

Dana said:


> Mortgages are federally legislated in Canada (i.e. how interest is calculated and applied) and is consistent from lender to lender.


… to a certain degree … however, the Bank Act applies only to certain specified financial institutions … private mortgages, such as might be available through some mortgage brokers, or directly between lender and borrower, are not necessarily held to the same standards. 



financeguru said:


> I have always got a variable mortgage and found always making less as compared to a fixed mortgage. I believe there are studies out there that prove unequivocally that variable mortgages beat fixed mortgages 9 out of 10.


Unequivocally?? ... I'd be willing to wager that none of those studies examined a time period that STARTED with rates at multi-generational lows. 

You may be right that the inevitable rise in rates might be slow to take hold, and might be very gradual ... or you might not ... its a gamble, but it sounds like you're going into it with your eyes open.


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## Cal (Jun 17, 2009)

financeguru said:


> Dana,
> I have always got a variable mortgage and found always making less as compared to a fixed mortgage. I believe there are studies out there that prove unequivocally that variable mortgages beat fixed mortgages 9 out of 10. I am going to go variable for the following reasons:
> 
> i. People who are saying one should go for a fixed mortgage (which represent 80% of canadian consumers as per the globeandmail) are overestimating how quickly the economy is going to grow. Fact is that U.S unemployment is hovering at 10% and the u.s consumer is deleveraging to a huge degree which means consumer spending that drives 2/3rd of economic activity is going to remain slow for the next while at least. So i see a protracted period of low interest rates. I also don't think that the canadian economy is deleveraged from the u.s enough that we will remain immune to what is happening in the states.
> ...


i.Rates are at never before seen lows. They are only going up. In Canada probably in July or August. Your rules for going variable may not apply for the next 4 years or so. See the current inflation rate for reasons as to why the rates are going up.

ii. Whats wrong with trying to time the market. You should try it sometime.

iii.doesn't your reasoning for fixed apply exactly the same to variable. ie. the banks will figure out a way to make a buck regardless of the rate.

v. you think the market will rise 18-20%, even though you have already stated that the US market probably won't do much over the next few years?

I am not trying to start an argument here. I just want you to see the flip side of things, to make an informed decision. Ultimately time will tell.

Why are you considering buying RE this spring? I am curious for the reasoning behind your timing of that purchase.


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## Dr_V (Oct 27, 2009)

Cal said:


> i.Rates are at never before seen lows. They are only going up. In Canada probably in July or August.


"Oh but _this_ time, it's different!" Is it really? Just because rates are low? I don't believe it. The problem is that, currently, fixed rates set by Canadian mortgage lenders tend to be _quite_ a bit higher than their variable counterparts. This makes sense from the perspective of economics -- with a fixed rate, the bank is assuming some of the rate risk, and so they're charging you extra for the "dependability".

And therein lies the crux of the issue -- just because rates are at historic lows, it does not imply that a fixed rate mortgage is a sure-fire winning strategy, because one cannot predict how rates will fluctuate over time. There is ample evidence to support the notion that Canadians are better off going variable.


K.


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## financeguru (Jan 18, 2010)

After some more thought, i've decided to go for a one year open variable rate. The rate being offered is 400 points off the prime (1.85). My reasoning is that I think the discount from prime on variable mortgages will still go higher - in 2009, variables were at prime+, and have decreased ever since. I'd like to reassess how strong the market is one year from now and see if the discount from prime is any higher. Based on this premise i might not be able to get the same fixed rates. But i'm willing to take the risk.



Cal said:


> i.Rates are at never before seen lows. They are only going up. In Canada probably in July or August. Your rules for going variable may not apply for the next 4 years or so. See the current inflation rate for reasons as to why the rates are going up.
> 
> ii. Whats wrong with trying to time the market. You should try it sometime.
> 
> ...


re: i and ii. I would like to make the minimum possible interest payment when my principle is highest and by extension interest costs are higher..which is at the beginning of the mortgage....the spread b/w the best variable rate and fixed rate for a 3 year mortgage is 1.4% (1.85 versus 3.25). Your guess is as good as mine as to high quickly and how much the rates will go up and what is the cutoff point where a fixed makes more sense than a variable...but i think this time period is as good as a time to go variable. I am willing to aggressively decrease my principle once rates go up as i have significant flexibility.


As far as timing the market goes, i'm not sure if i can successfully time the market, maybe you can? Do you really think fixed will be better? I am fairly comfortable in my assumption that if i continuously go variable, i willl save money for myself.

re: iii True, banks always make money irrespective of fixed or variable. However you pay a premium for the peace of mind of a fixed rate, and if you can accept rate fluctuation, then you end up paying less interest with variable.

re. v I think the market will go up 18%-20%, whether this happens by the end of the year or in 2 years, i don't know. I think the recovery will be a bit muted - I do think that we are over the worst. Also the markets are a leading indicator of economic recovery...so the market will rise before we see a general improvement in the economy. See rise in the market circa 2009-2010.

Agreed, everyone has a different disposition to risk and have different circumstances and that should be the most important determinant...whatever makes you sleep better. That said, a mortgage is the biggest expense in your monthly expenses and one should do one's due diligence. The decisions one makes can end up costing 1000s of dollars over the life of the mortgage.

As to why we purchased a house at this time, this is a preconstruction mortgage , that we purchased in july, its good that we did....again real estate was at a low time low at that time. 

We should probably revisit this thread 3 years from now and in b/w and see how it goes.


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## Oldroe (Sep 18, 2009)

Lots of good stuff.

The key to mortgages is drive the amortization period down and the next biggest key is drive that amortization period down.


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## cardhu (May 26, 2009)

Dr.V said:


> There is ample evidence


Milevski’s studies did not examine any time period that STARTED with rates at multi-generational lows ... it is one thing to look backward from 2010 and conclude that during a period in which rates fell or remained unchanged more often than they rose, variable was the better choice most of the time ... it is quite another to look forward from 2010 and be confident that the same will hold true in the future.

This is not a case of _“this time its different”_ ... its merely that the results are predictable when you study time periods during which upward rate movements were in the minority. I don’t think anyone is implying that a fixed-rate mortgage is a sure-fire anything ... but it certainly has less chance of being a losing strategy than Milevski’s studies would suggest. 

Personally, I've done well with variable rates, but there is ZERO chance that rates will continue to fall in the next 15 years to the degree they fell in the past 15 years. ... fortunately, its not a decision I have to make, ever again.


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## Y&T2010 (Dec 29, 2009)

Interesting discussion!

I am in the process of getting a pre-approved mortgage and have been debating between the fixed and variable mortgage.

I'm thinking of taking a variable mortgage for one year or so, then switching to fixed if prime rises.


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## bean438 (Jul 18, 2009)

I just signed a 1 year closed for 1.99.
However, every pay period I put away a "top up" that equates to a 5 year fixed payment. Every 6 months or so I will make a lump sump prepayment.


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## Oldroe (Sep 18, 2009)

Bean great strategy I would get the top up in as fast as allowed.


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## Dr_V (Oct 27, 2009)

cardhu said:


> Milevski’s studies did not examine any time period that STARTED with rates at multi-generational lows ...


But it's largely irrelevant what rates are at right now -- it's a question of _how quickly_ they go up, and _by how much_. That's why it's such a notoriously difficult thing to predict. (I think that it's a foregone conclusion that rates are going to go up -- I'm not debating that.)

Cannon Fodder's spreadsheet may help readers to make some reasonable guesses as to which strategy they think will be best.


K.


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## cardhu (May 26, 2009)

Dr_V said:


> ... it's largely irrelevant what rates are at right now [/I].


Well, yes and no ... I agree that rates do not need to go down for a variable rate to come out ahead of a fixed rate ... rates can remain level, or rise very slowly, or even rise quickly toward the end of a term, and still acheive the same outcome ... in that respect, I agree its a question of how quickly and by how much rates rise.

My point is, during the time periods studied by Milevski, if you look at month-to-month rate patterns, rates either stepped downward, or remained level, more often than they went up ... so it should not come as any great surprise that variable rate came out ahead of fixed rate, more often during his study periods ... but (and here is where it remains relevant where rates are today) in the immediate future, downward steps in rates are not really in the cards, so when you take those downward steps off the table, what are you left with? Only upward steps, or rates remaining level. And that is bound to change the probabilities, as compared to Milevski's findings. 

That's all I'm saying ... the argument in favour of variable is not nearly as compelling as it once was. 

The spreadsheet you linked to is interesting, and nicely demonstrates the timing and scale of rate increases that would be necessary for a fixed rate to come out ahead.


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## financeguru (Jan 18, 2010)

cardhu said:


> My point is, during the time periods studied by Milevski, if you look at month-to-month rate patterns, rates either stepped downward, or remained level, more often than they went up ...


How can you say that? I have not looked at his work in detail, but i would imagine that if he took a reasonably large sample time period, then ups and downs would cancel out.


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## MoneyGal (Apr 24, 2009)

The seminal paper is here, and the time period studied is 1950 to 2000. The paper also simulates 50,000 random, forward-looking scenarios using a Monte Carlo analysis.


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## Happyvdubber (Feb 26, 2010)

bean438 said:


> I just signed a 1 year closed for 1.99.
> However, every pay period I put away a "top up" that equates to a 5 year fixed payment. Every 6 months or so I will make a lump sump prepayment.


I'm thinking I may do the same thing. My mortgage renewal comes due on May 1. 

- VRM @ 1.8% (5 yr term/w option to lock into a 3 year fixed at anytime)
- Payments at the 5 yr fixed rate
- Accelerated Bi-weekly payment schedule
- Lump sum @ available anniversaries


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## mrgender (Mar 8, 2010)

from where are you getting a 5-year VRM @ 1.8%?
open or closed?


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