# Market crash due to rising interest rates?



## yousufj56 (Oct 4, 2018)

Is this a real possibility? 

If youre in a variable contract, do you have to renew every year? Meaning higher rates?


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## Just a Guy (Mar 27, 2012)

Variable means every time the interest rate increases, so does your rate.

As for it being possible, I think it will be the cause. Unlike variable, fixed interest rate (the most common mortgage is a 5 year fixed) don’t change until you need to renew. Imagine the shock when, after 5 years of making payments, your faced with a sudden and significant increase (about $50/month for each 1% increase on each 100k borrowed). 

If you try to sell, the people who you’re selling to won’t be able to afford the house any more than you can, so price crashes are bound to happen, if not foreclosures.


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

It is a possibility but highly unlikely.

Variable rate mortgage does not have to renew every year. You select the term you want (most common are 5 years but 3 years are also available) which locks in a discount to the lender's prime rate. Current bank prime rate is 3.70% almost everywhere (TD is higher at 3.85%). Your discount doesn't change for the term of your mortgage but the bank's prime rate could - it benchmarks with Canada's prime rate.

I'm one of those who *doesn't *believe the market will crash. I believe inflation will catch up before anything goes sour. 

That being said, stick with a variable rate mortgage. Always choose the lowest rate available - not the highest. Its a mortgage, not an insurance policy.


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## lonewolf :) (Sep 13, 2016)

Mortgage u/w said:


> That being said, stick with a variable rate mortgage. Always choose the lowest rate available - not the highest. Its a mortgage, not an insurance policy.


 Meridian credit union has 5 year fixed rate mortgage 3.19%. How much higher is 3.19% then the current rate on variable rate mortgage @ a bank ?


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

lonewolf :) said:


> Meridian credit union has 5 year fixed rate mortgage 3.19%. How much higher is 3.19% then the current rate on variable rate mortgage @ a bank ?


The most common variable is at prime minus 1.00%, so 2.70% today. Minus 1.25% can also be found giving a rate of 2.45%.

3.19% fixed looks good - but you are paying between 0.50% to 0.75% premium for that security....


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## Just a Guy (Mar 27, 2012)

If the prime interest rate rises 2-3 times in he first 2.5 years it’s pretty much a break even, if it rises more in that time period and doesn’t drop, you come out ahead. Variable works great ina falling interest rate market. It doesn’t work as well in a rising one.


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

Just a Guy said:


> If the prime interest rate rises 2-3 times in he first 2.5 years it’s pretty much a break even, if it rises more in that time period and doesn’t drop, you come out ahead. Variable works great ina falling interest rate market. It doesn’t work as well in a rising one.


Not entirely true.
We tend to forget that most mortgage rates we choose are for a very short period of only 5 years.

Even if your rate rises within the first 2.5 years, you can't ignore the fact you saved for that period. In order for you to "break even", the rate needs to rise a lot more than just to its fixed rate equivalency at the time you booked.

Variable works in every market situations. If rates fall, its a bonus. If they rise, you still benefited. What everyone seems to forget is that 5 years comes up fast and you will be faced with a new rate to lock-in. Do you lock-in another fixed rate with a premium or choose again the lowest rate available and reap the benefits??


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## Just a Guy (Mar 27, 2012)

You’re right, my math was off, it has to rise by the same amount over to average out...too early, however, I’m betting that interest rates will rise a lot more than a couple % in the next few years. At these low rates it doesn’t really matter much. I just renewed a couple of mortgages yesterday as interest rates rose today by .2%. The funny thing is it’s slightly less today than it was 5 years ago for fixed despite the increase in the prime rate, my discount got larger. My crystal ball doesn’t work any better since I got it back from the shop, that being said the interest portion of the loan is very small still compared to the principle pay down so I’m not going to complain.


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

What's off nowadays is there no longer exists just one standard fixed or variable rate . The rate on an insured purchase is going to be different than for a refinance. Same thing for a rental vs owner-occupied - not the same rate.

Ever since CMHC pulled out, it caused a restriction on how lenders raise money to fund their mortgages. Banks have some more flexibility since they raise most of their money on their own.

It all comes down to your comfort level. I've always said - mortgage rates below 4% are considered abnormal, so for me, 2.50% or 3.50% is a still a bargain. It may not be for someone seeking an $800,000 mortgage on a house that's worth $900,000. Unfortunately this is the reality for many which is why 0.01% makes all the difference.


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## lonewolf :) (Sep 13, 2016)

When it comes to investing I first look to see what I can lose. Using a fix rate mortgage is like placing a stop on the loss.

My eyes also tell me important down trend lines on interest rates have been broken so odds are for higher rates. 

I look at is the risk/reward, I just do not see a big up move in the none move able assets @ this time though I see plenty of down side. So not touching real estate


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## Just a Guy (Mar 27, 2012)

Just talked to a banker today. He was telling me that, due to recent competition, all their posted rates (not the discounted rates) are actually below break even right now. It won’t last.


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## nobleea (Oct 11, 2013)

lonewolf :) said:


> When it comes to investing I first look to see what I can lose. Using a fix rate mortgage is like placing a stop on the loss.


It's also placing a limit sell order at the same time since you limit your downside and your upside.

Clearly there's not a lot of upside left given the current rates. The amount of downside remains to be seen.


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## hfp75 (Mar 15, 2018)

If your cash is tight or your mortgage is med-lrg, I’d look at a fixed.... if your money’s flowing good or your debt is not a lot get a variable....

Due to rising rates I too don’t see re as a smart option right now...


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## Just a Guy (Mar 27, 2012)

It depends on the individual piece of real estate...just came across a listing for a 1 bedroom, 700 sq. Ft. For $39,900. May be worth taking a look. Should rent for at least $800/month for the area. Then again the building could be a dump about to fall down.


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