# Buying your first house.



## paulkoshy (Apr 6, 2009)

I am looking at purchasing a property (condo or otherwise) as a primary residence close to next fall so by about October 2009.

My question for those of you that already own properties, is how much did you put down and what must I watch out for? 

Is there a real benefit to putting a huge downpayment down if I only intend to stay there for a few years and then sell it or make it a rental property.

Does zero down stilll exist in Canada? I see ads from realtors in Toronto saying I can put zero down still...what's the deal?


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## mfd (Apr 3, 2009)

- We put down 25% on our condo. As for anything to watch out for....I'm not really sure. I guess in our condo we looked at any particular rules that the board might have, an analysis of the reserve fund and how quickly they intend to raise the condo fees. Also know who your neighbors are. As well with a condo I would recommend buying a unit that is move in ready for you because major renovations in the a condo is a pain in the butt.

- I don't see any real reason why you wouldn't put as much down as possible on a mortgage no matter when you intend to sell it. The time you are there you'll have lower payments and pay less interest. You'll also avoid CMHC charges. I also think banks would give you better interest rates with a better down payment. The only thing I can figure is that you maybe wouldn't touch an emergency fund to add to the downpayment.

- I think they still have zero down mortgages for shorter terms. I think what they stopped doing was zero down 40 year mortgages but I could be wrong.


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## Elbyron (Apr 3, 2009)

These days you need 20% down to avoid paying mortgage insurance (CHMC). If you only have 15%, then the property will cost 1.75% more. If you've got a 10% down payment, it costs 2% more, and if you only have 5% then you'll pay 2.75% more. This is an up-front cost but it usually gets tagged onto the total mortgage amount, so you pay for it slowly over the duration of the mortgage.

If you plan to sell it in a few years, you're better off with 20% down. But if you will be renting it, you may want to keep most of your downpayment money for the next property. The reason is that when you convert your principal residence to a rental, then the interest on the original mortgage becomes tax deductible. But if you were just to re-finance (in order to get the money for downpayment on a new residence) then the interest is not deductible, because the direct use of the borrowed funds is to purchase a personal property.

To learn more about buying a home, check out the CHMC step-by-step guide to homebuying.

I haven't seen 0% down lately, but look around, maybe someone is offering it. Beware of high administration fees, and of course the CMHC insurance fee.


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## UpNorth (Apr 3, 2009)

We bought our first house about eight months ago and put 5% down using the home buyers plan. I would have liked to put more down to reduce CMHC fees but that's the amount we had. Besides the downpayment, we made sure we had about $5000 set aside for all the closing costs and all the other related expenses of moving into a new house.


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## Alexandra (Apr 3, 2009)

We have a tenant in our basement, and therefore we put down as little as we possibly could, so we could use the tax deduction on our interest payments. We have a 40 year mortgage, and we were not allowed to put 0% down...I think they forced us to put over 5%, but I can't remember the exact number.

If you aren't planning on having a tenant, then you might as well try to put down 20% to avoid the CMHC charges.


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## Ben (Apr 3, 2009)

Just a couple of big-picture things to put some thought into:

1. I'd be cautious of buying a property with a negligible downpayment with the intent to sell in a couple of years. House prices seem to be falling in Canada. With a small downpayment, there's a real chance you could end up having a larger mortgage than your condo was worth in a couple of years. I would do some research into the relative health of the Toronto condo market, decide where you think condo prices will be in a couple of years, and then decide how much you should put down.

2. The benefit to putting down a decent downpayment is that you avoid a possible situation where you can't sell the place because it would actually cost you money to sell for less than the value of the mortgage.

We personally put 20% down on our house, and have concentrated heavily on reducing the mortgage in the 3.5 years since then.


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## lister (Apr 3, 2009)

I bought pre-construction and had four years to come up with the full 25%. The first 15% was spread out over nearly two years while the remaining 10% was due at closing. i do accelerated bi-weekly with a 25% increased payment on top of that. I haven't done any lump sum yearly payments yet.

Watch out for all the additional closing costs. They add up.

I have no intention of selling though may rent it out if we get a bigger place later.


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## CanadianCapitalist (Mar 31, 2009)

I've always hated debt, so when we purchased our home we put down an insane downpayment (much more than the 25% required to avoid mortgage insurance back then). Having a very small or no down payment at all may not be appropriate for most people.


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## Sampson (Apr 3, 2009)

I was much the same (insane - pushing 40%) down payment on our first condo. We were on track to pay it off in 5 years. We were very debt adverse (and still are - sorta).

but took on more in the upgrade to a house.

I'm surprised how easily we let ourselves break that mode of thinking - houses only go up in value right?!?


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## OnlineHarvest (Apr 6, 2009)

paulkoshy said:


> I am looking at purchasing a property (condo or otherwise) as a primary residence close to next fall so by about October 2009.
> 
> My question for those of you that already own properties, is how much did you put down and what must I watch out for?
> 
> ...


A lot of good advice already.

We put 25% down a little under a year ago. If the market were to go severely down and you have little down, you will NOT be moving since you'd be owing more than the property is worth. A higher down payment helps to mitigate this.

Closing costs are killer. Many do not account for them. Try to save like crazy and have a down payment large enough to avoid the fees, but keep some back for those closing costs. 

Don't forget the implicit 'closing' costs. Everyone seems to think they can 'live in an empty house for years as we save', but most are dreaming. You need to account for furnishings, drapes/blinds, and additional monthly costs associated with home ownership.

All in all though, home ownership is fun and exciting! Of course there is a ton of stress but have fun with it! Take pride in what you own and do not buy what you cannot afford (what a concept huh! ).


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## paulkoshy (Apr 6, 2009)

Thanks everyone for the great responses.

I think what I'm really having a problem with is that long term thinking. 
I want to own something now, actually yesterday , so have been exploring options to get me there faster, as opposed to doing it the old fashion way by saving and waiting.


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## DrStan (Apr 5, 2009)

There are a number of fees to look out for:

Lawyer fee and expenses
Mortgage-related fees (appraisal, etc.)
Connection for utilities (phone, cable, gas, water)
Moving
Cleaning 
Bringing the new property up to speed with paint, lighting, etc. if required

And pleasant things like property tax... and condo fees if you go that route.

If you have plenty of money for a downpayment, as the original post implies, why not use it, avoid the CMHC fees and reduce interest? That is, unless you firmly intend on making it a rental property in a couple of years. Then invest as little as possible, because you want to generate deductible expenses (interest on mortgage).


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## mfd (Apr 3, 2009)

You seem real eager to buy. Take it from someone who was in your situaution you may end up with something you really don't like. Since you might have a short term perspective you might want to look a Revt vs Buy calculator to see if its worth buying:

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html


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## Ben (Apr 3, 2009)

paulkoshy said:


> have been exploring options to get me there faster, as opposed to doing it the old fashion way by saving and waiting.


To me, this is exactly the time in history to be doing it the old fashion way.


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## v_tofu (Apr 16, 2009)

Hi there,

Would someone be able to give me a rough estimate of closing costs for an ~250K home?

I've been hearing about 2.5%? is that correct? And what exactly does that cover?

cheers,


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## Rickson9 (Apr 9, 2009)

paulkoshy said:


> Thanks everyone for the great responses.
> 
> I think what I'm really having a problem with is that long term thinking.
> I want to own something now, actually yesterday , so have been exploring options to get me there faster, as opposed to doing it the old fashion way by saving and waiting.


Saving and waiting isn't a bad idea. My wife and I subscribe to saving and waiting. Investors do poorly when they try to move quickly. If you had saved and waited in the stock market, you would have had a field day at the end of 2007 and well into 2008. If you wanted to get in as soon as possible, you would have likely been hurt.


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## FrugalTrader (Oct 13, 2008)

v_tofu said:


> Hi there,
> 
> Would someone be able to give me a rough estimate of closing costs for an ~250K home?
> 
> ...


It depends on what province you are from and it varies greatly. Here in NL, you have to pay legal fees ($700 for buying) + a mortgage tax. When it's all said and done, it will cost around $2500 in legal fees to buy a house. However, legal fees are lower when you sell, but then again, you may have to pay a realtor (5%).


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## takingprofits (Apr 13, 2009)

paulkoshy said:


> I think what I'm really having a problem with is that long term thinking.
> I want to own something now, actually yesterday , so have been exploring options to get me there faster, as opposed to doing it the old fashion way by saving and waiting.


Depending on the real estate market where you live - if the market is strong it is worthwhile to consider buying with less down if it means buying sooner, stopping paying rent sooner, and beginning to build equity. 

When you make the decision to stop renting and buy a home every rent payment you make after that decision is a payment that could be going towards your equity instead of someone elses.


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## MGL (Apr 6, 2009)

v_tofu said:


> Hi there,
> 
> Would someone be able to give me a rough estimate of closing costs for an ~250K home?
> 
> ...


Like FT said, it's highly dependent on your province. I did a post a while back about understanding closing costs that will give you a general idea of what to expect:

http://moneygrubbinglawyer.com/2008/09/17/understanding-closing-costs-and-a-tax-credit-too/


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## paulkoshy (Apr 6, 2009)

I think the main goal for me is to start building equity as soon as possible not actually live on my own. Obviously that is something that might go hand in hand with buying property. 

I currently do not pay rent and have very little other expenses, so I feel like I should be putting that money towards a property and rent it out if I don't move into it, in which case I get the idea that mortgage insruance is really the only major hit I would incur.

And if I was looking at a studio or 1 bdr condo in DT Toronto between 150-175K, the mortgage payment + condo fees wouldn't be too high even if i didn't have 20pc down, and especially if I had a HELOC mortgage no?


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## mfd (Apr 3, 2009)

paulkoshy said:


> And if I was looking at a studio or 1 bdr condo in DT Toronto between 150-175K, the mortgage payment + condo fees wouldn't be too high even if i didn't have 20pc down, and especially if I had a HELOC mortgage no?


I haven't looked at prices recently but I doubt you'll find anything in that price range....at least not something made in the last 20 years. Maybe something north of yonge and eglinton.


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## Ben (Apr 3, 2009)

paulkoshy said:


> I think the main goal for me is to start building equity as soon as possible not actually live on my own. Obviously that is something that might go hand in hand with buying property.
> 
> I currently do not pay rent and have very little other expenses, so I feel like I should be putting that money towards a property and rent it out if I don't move into it, in which case I get the idea that mortgage insruance is really the only major hit I would incur.
> 
> And if I was looking at a studio or 1 bdr condo in DT Toronto between 150-175K, the mortgage payment + condo fees wouldn't be too high even if i didn't have 20pc down, and especially if I had a HELOC mortgage no?


I'm sure there is more comprehensive analysis on some other threads in Real Estate. My two cents (I am not an investment property owner).

Buying a property when property values are rising can be a great idea, because if even if you only chew tiny amounts off the mortgage, you build equity through the price appreciation of the property.

Buying a property when property values are falling can be more complicated. If you buy with a small downpayment, you can find yourself owing more on the mortgage than the property is worth. This could lead to a difficult situation when the mortgage came up for renegotiation/renewal, as the lender may decide not to offer you a new mortgage term.

Every statistic I've read tells me that real estate values are down in most (not all) areas of Canada, some less than others. Toronto has not fared that badly compared to some Western cities, but it still down from the peak and year-over-year as well I believe. 

A partial list of things you may want to consider:
1. Have you calculated and saved the amount of the closing costs/fees? 
2. How long do you intend to own the condo?
3. What do you think the condo will be worth when your mortgage term is up for renewal, or when you decide to sell it?
4. Do you feel your job is secure?
5. Is 150k for a condo in Toronto really current market value? 
6. How much will the mortgage/property tax/condo fees be? Does the anticipated rent you'll be able to charge make the condo cash-flow positive? Per RBC April 2007 report, 2006 condo property taxes were just above 0.8% of the condo value. Looking on http://www.condofees.com/, using 50cents/sq.ft seems a reasonable approximation of the condo fees. Assuming a 600sq.ft pad, and 150k purchase price, property tax would be $100/month and condo fees $300/month. Assuming 5% down at 150k purchase price, monthly mortgage payments would be $750. Total monthly carrying costs therefore about $1150.

There's no one size fits all solution on when to buy, or what to buy, but there are a lot of things that need proper consideration before making a decision. Do your research and do what's right for you. Check out the other real estate threads - there is a wealth of information in there already.


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## Ben (Apr 3, 2009)

An article today in Toronto Star with a similar scenario.

http://www.yourhome.ca/homes/article/624821


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## KanyEast (May 12, 2009)

*Risk Factor:First home*

Hey y'all,
just wondering if i can get some suggestions from the gurus that are already in the rental business. I'm a young professional and have managed to save only about $10000 towards my frsit home purchase. My intention is to get a place with about 3 or so bedrooms and rent it out. I'm currently single so that makes it a lot easier i guess. Eventually, this will be my rental property when i buy my second property as a family home. So here are my questions;
i) do i tell the bank this will be a rental property or my principal residence. technically it is my main place of residence but i'll mos def rent out the rest of the rooms to bring in some income
ii) how risky will it be if i have a 5% down payment. I know the mortgage will be high but i'm hoping that with the rent i can, mortgage will be covered
ii)i have an awesome credit history and my bank has pre-approved about 300K in mortgage. This is the max i can afford based on how much i make and with the assumption that this will be my principal resident and the only on paying the mortgage. Considering that i wanna rent it out, how safe will it be for me to go up alittle bit to say a 400K mortgage!!

Thanks you all very much and i'm looking forward to some insightful advice from you all


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## Rickson9 (Apr 9, 2009)

KanyEast said:


> i) do i tell the bank this will be a rental property or my principal residence. technically it is my main place of residence but i'll mos def rent out the rest of the rooms to bring in some income


It is your principle residence. If the place isn't a legal retrofit, it is illegal to rent it out.



KanyEast said:


> ii) how risky will it be if i have a 5% down payment. I know the mortgage will be high but i'm hoping that with the rent i can, mortgage will be covered


Very risky. I would never put down only 5%.



KanyEast said:


> ii)i have an awesome credit history and my bank has pre-approved about 300K in mortgage. This is the max i can afford based on how much i make and with the assumption that this will be my principal resident and the only on paying the mortgage. Considering that i wanna rent it out, how safe will it be for me to go up alittle bit to say a 400K mortgage!!


At 5% down this is a very bad idea.

However, if I were to give advice that was self serving, I would encourage this kind of borrowing because I just know that it will speed up the time until I can take advantage of the consequences. In self-interest, I would encourage everybody and anybody to put 5% down and maximize their opportunity to buy a property.


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## KanyEast (May 12, 2009)

hmm...yea, my fear is not been able to protect my investment. I've read a lot of real estate investment books and i feel so pump i just wanna hop into the market regardless of the risk but i wanna be wise about it too.
@Rickson9, what would you think about <300K rental property again with a 5% down? Also if i got you right, i must mention to the bank or mortgage broker this will be a rental property or it'll be illegal to rent???
Thanks!!

P.S. still learning and anyone pardon me for silly and obvious questions


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## DAvid (Apr 3, 2009)

KanyEast said:


> My intention is to get a place with about 3 or so bedrooms and rent it out. I'm currently single so that makes it a lot easier i guess.


If you are taking in boarders, there should be less of an issue than if you were renting individual suites. Most municipalities see the issues of the two rentals completely differently, as does most landlord - tenant legislation.



> Eventually, this will be my rental property when i buy my second property as a family home.


You may have to look at renting it in a different fashion once you no longer live there. Thus you may need to change from a multi-bachelor pad to a family home.



> i) do i tell the bank this will be a rental property or my principal residence. technically it is my main place of residence but i'll mos def rent out the rest of the rooms to bring in some income


Then it is your principal residence. Even if you have two roomies.



> ii) how risky will it be if i have a 5% down payment. I know the mortgage will be high but i'm hoping that with the rent i can, mortgage will be covered
> ii)i have an awesome credit history and my bank has pre-approved about 300K in mortgage. This is the max i can afford based on how much i make and with the assumption that this will be my principal resident and the only on paying the mortgage. Considering that i wanna rent it out, how safe will it be for me to go up alittle bit to say a 400K mortgage!!


I'd stick with the manageable amount first, and see if you really want to be a landlord....


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## Rickson9 (Apr 9, 2009)

KanyEast said:


> hmm...yea, my fear is not been able to protect my investment. I've read a lot of real estate investment books and i feel so pump i just wanna hop into the market regardless of the risk but i wanna be wise about it too.


The pump you're feeling is one of the most dangerous emotions you can have as an investor. Investing is a sport most successfully played cold with a small dose of fear.



KanyEast said:


> @Rickson9, what would you think about <300K rental property again with a 5% down? Also if i got you right, i must mention to the bank or mortgage broker this will be a rental property or it'll be illegal to rent???
> Thanks!!
> 
> P.S. still learning and anyone pardon me for silly and obvious questions


If I was going to put only 5% down on a $300k rental property (ie: $15k) I would only do so with a real 10%+ cap rate, get a longer term (10+ yr minimum) and a shorter amortization period to keep my risk exposure lower (20 yrs max).

Having said that, I would never put only 5% down.


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## takingprofits (Apr 13, 2009)

KanyEast said:


> what would you think about <300K rental property again with a 5% down? Also if i got you right, i must mention to the bank or mortgage broker this will be a rental property or it'll be illegal to rent???
> Thanks!!


I think you will find that if the bank is aware that you intend on renting out the property you will not be eligible for a 5% down mortgage. Investment properties require a larger down payment. (unless there has been a major change in this area that I am not aware of.)


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## Brad911 (Apr 19, 2009)

I'll be buying my first home in July and was quoted a 5-year fixed rate of 3.64% from TDCT. Anyone else been shopping rates? I looked around and with a mortgage broker and this seemed to be the best rate available at this time. I have no desire to go variable at this time considering where we are in this rate environment.


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## FrugalTrader (Oct 13, 2008)

Brad, 3.65% for 5 year fixed is the best rate my broker offers.


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## Sampson (Apr 3, 2009)

I've been offered 3.59% for a 5 year fixed, closed - this was a quick close mortgage, but had decent (10%) annual prepayment options.

I think there are several lenders offering this, not a huge advantage over your 3.64% though.


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## Brad911 (Apr 19, 2009)

The mortgage I was preapproved for has a prepayment option of 15% per anum over the 10% which probably works out to be close to even when you consider the lower rate.


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## dogcom (May 23, 2009)

That is a good rate for a 5-year fixed. You could also get a one time mortgage break if you pay an extra quarter to half a point with some lenders. But with a rate like that I don't think you will see much better then that.


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## iherald (Apr 18, 2009)

Brad911 said:


> I'll be buying my first home in July and was quoted a 5-year fixed rate of 3.64% from TDCT. Anyone else been shopping rates? I looked around and with a mortgage broker and this seemed to be the best rate available at this time. I have no desire to go variable at this time considering where we are in this rate environment.


Northwood Mortgage seems to have a 3.54 mortgage right now in Toronto anyway:

http://www.ratesupermarket.ca/


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## Four Pillars (Apr 5, 2009)

I would suggest being patient - rushing a purchase doesn't always work out well.

Also - if you are planning to sell in a few years then just rent - I don't think it's worth buying if you know you are not going to own it for at least 4-5 years.


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## AshleyT (May 1, 2009)

Brad911 said:


> I'll be buying my first home in July and was quoted a 5-year fixed rate of 3.64% from TDCT. Anyone else been shopping rates? I looked around and with a mortgage broker and this seemed to be the best rate available at this time. I have no desire to go variable at this time considering where we are in this rate environment.


That seems to be in the ballpark. I was quoted 3.49% at TD last week, but on a 7 figure loan. I have also been quoted variable at prime (2.25% currently).

I'm curious why you think fixed is a sure thing here? I agree that rates are as low as they can go, however when I run some numbers in a spreadsheet, I note that rates could go up 0.5% each year over a 5 year term, and variable still comes out ahead. Even 0.75%, and it is basically too close to call....a saw off. That's 5%+ by the end of the term, and the variable is still competitive. Those are modestly rapid rate increases. On the other hand, if the economy continues to sag, and inflation is low or there is deflation (as I expect in the next 18-24 months), then you could be floating along at a rate considerably lower than fixed for a full two years. At that point (2011), it would take some really rapid rate increases to make the fixed worthwhile over your term. Even in the current interest rate environment, I think the odds are still in favour of variable for the retail borrower. The banks just don't take random risks and give consumers great deals. The rates are where they are because they don't see any inflation on the horizon, but rather a real risk of deflation in the short term. They are happy to have someone come along and pay three and a half for 5 years because they think they will come out ahead compared to having you take a variable rate loan over the same term. If you happen to guess right, then maybe you can get lucky. However, there are people getting paid 6 figures at those banks to figure out where the economy, inflation, and the bond markets are going, and what to offer in fixed rate mortgages. If I had to bet on who was going to come out ahead in this deal, I would bet on the bank over the consumer, with the current interest rate environment in full consideration.


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## Brad911 (Apr 19, 2009)

AshleyT said:


> I'm curious why you think fixed is a sure thing here?...


I don't advocate that its a sure thing; just that for my situation a fixed rate at 3.64% makes a lot of sense for me & my fiancee. When I look at a variable rate mortgage there is one big disadvantage to that type of mortgage in this economic climate: uncertainty. True rates may still be in the 3-5% range on fixed mortgages in five years, but we're fighting deflation of a lot of assets right now (no other reason for all this massive stimulus) and the other side of huge deficits (which we are certainly running right now at all levels of government) is inflation. That's just not inflation from goods and services, but also an increased cost of serving the higher debt we're taking on.

If I could go for 3.64% for 10 years I'd even do that. People forget that this "variable range" that we're in right now is not the norm (nor was prime minus variable mortgages). The range for most variable mortgages, historically, is above 3.64% so why not go fixed? Unless we're creating some new trend where interest rates stay here for an extended period of time, my strategy is prudent and conservative (which fits my risk tolerance). I don't have a desire to pay the first five years of my mortgage any any rate above where I was quoted my fixed rate. I have confidence that in 5 years when I refinance I'll be looking at close to double the current rate for a fixed and variable at that time will be an option if rates are fairly stable. But in this environment with deficits looming it seems pretty obvious to me (as I examine unemployment numbers rising) that we're in for some hurt on the interest rate front.


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## AshleyT (May 1, 2009)

Brad911 said:


> I don't advocate that its a sure thing; just that for my situation a fixed rate at 3.64% makes a lot of sense for me & my fiancee. When I look at a variable rate mortgage there is one big disadvantage to that type of mortgage in this economic climate: uncertainty


Fair enough. Just like investing, return (or in this case interest expense) must be considered in the context of risk. However, we don't share the same views on the amount of interest rate risk at the current time. If we were to apply a Gaussian curve to the many different paths that interest rates may take over the next 5 years, it seems to me that you are trying to protect yourself from an event that lies one full standard deviation to the right of the mean, and possibly two. Yes it is possible interest rates could increase 7+% in 5 years, but is it probable? I would say it as likely or maybe slightly less likely than interest rates staying exactly where they are for the next 5 years. Both are extremes with a low probabilities, perhaps <5% chance that they will happen if those possiblities lie greater than 2 SD beyond the mean (I don't know exactly where they may lie, other than they are extremes). There are infinite possibilities between these two selected extremes, and the possibilities closest to the average change in interest rates over 5 years will be the most probable. It seems to me your premise is centered on an extreme change in interest rates which comes from a hunch based on some recent government spending. 



> If I could go for 3.64% for 10 years


You wouldn't be able to get that because the term is different. The longer the term, the higher the rate to protect the bank from the possibility of a higher average interest rate over the term.



> The range for most variable mortgages, historically, is above 3.64% so why not go fixed


I don't think this is relevant. That's like saying TD bank was selling for $75, and now it's selling for $55, so why not buy it? History can give you information about average movements in interest rates which can serve some use in seeing the probability of an event from this point in time, although history will not tell you what will happen in the future. The only thing you really want to know is what will happen in the next 5 years. Using historical rates that average 6 or 7% is irrelevant since your starting point is at the bottom which makes an average interest rate of 6 or 7% over your 5 year term highly improbable.



> Unless we're creating some new trend where interest rates stay here for an extended period of time


I'm not suggesting that they will. I suspect that interest rates will increase at some point in the next 5 years. When and by how much? I have no idea. But again, comparing a 100 year trend/average is not relevant. We are where we are. What you need to know is what are the most likely possibilities for interest rates over the next 5 years from this point (prime 2.25%). 



> my strategy is prudent and conservative (which fits my risk tolerance).


Agreed, and fair enough.



> I have confidence that in 5 years when I refinance I'll be looking at close to double the current rate


I don't know about double, but almost certainly higher. But again, it doesn't matter where it ends in 5 years. For mimimizing the amount of interest paid, it only matters what the average rate you pay over your term. If you are prepaying in large amounts, that makes low rates in the early years (when deflation/low interest rates are likely to persist in the current economic environment) that much more valuable which would futher favour a variable rate.

I think Moshe Milevsky's work (http://www.ifid.ca/pdf_workingpapers/WP2001A.pdf) remains just as relevant now as it does in any other interest rate environment. The banks do a great job of covering their risks on fixed rate mortgages. As he showed in his paper, fixed rate has won out over variable <12% of the time historically. Using his work, there is an 88% chance that you will pay more interest in the next 5 years with a fixed rate contract compared to variable contract.


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## Brad911 (Apr 19, 2009)

AshleyT said:


> Both are extremes with a low probabilities, perhaps <5% chance that they will happen if those possiblities lie greater than 2 SD beyond the mean (I don't know exactly where they may lie, other than they are extremes).


I'll argue that where we are right now is 2 SD away from the mean (if not more) if you look at any long term interest rate chart (100, 25, 10, etc). It's only been in the last few years that interest rates have remained below the mean. You have your opinions, I have mine. I didn't graduate from business school yesterday and I'll stick with my common sense approach to economics. When everyone is sitting down enjoying the party I'm already thinking about who might come to break it up.


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## AshleyT (May 1, 2009)

Hi Brad,

Thanks for your reply. I think we are having an engaging and interesting debate.



Brad911 said:


> I'll argue that where we are right now is 2 SD away from the mean (if not more) if you look at any long term interest rate chart (100, 25, 10, etc). It's only been in the last few years that interest rates have remained below the mean.


Again, here I would argue that you are using the incorrect metric in your analysis. Statistical probability can be used on past data to see where a metric is located relative to historical averages. That static information might be interesting, but I would argue, shouldn't be used to make a decision about the future of that metric. What matters most in the fixed vs variable decision is the statistical probability of various interest rate scenerios in the next 5 years. This is where historical information might be useful, but the historical information that should be of interest in this decision is the _rate of change_ in interest rates over historical periods, perhaps even the history of how quickly and by how much interest rates have changed after previous bear markets. That won't tell you exactly what will happen in the next 5 years obviously, but it might give you an idea of the probability of an interest rate outcome (such has the oft-predicted rapid inflation/hyperinflation scenerio these days) in the next 5 years. 

The fact that current interest rates are at generational lows is not relevant to this decision, in my opinion.


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## iherald (Apr 18, 2009)

AshleyT said:


> That seems to be in the ballpark. I was quoted 3.49% at TD last week, but on a 7 figure loan. I have also been quoted variable at prime (2.25% currently).


Ashley, 7 figure loan...that leads me to one question....you single?


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## Ben (Apr 3, 2009)

Brad911 said:


> When everyone is sitting down enjoying the party I'm already thinking about who might come to break it up.


I like that.


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## AshleyT (May 1, 2009)

iherald said:


> Ashley, 7 figure loan...that leads me to one question....you single?




No, not single which helps since I wouldn't want to take on that kind of debt all by myself. It would be lonely.


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## Brad911 (Apr 19, 2009)

AshleyT said:


> The fact that current interest rates are at generational lows is not relevant to this decision, in my opinion.


I think they are completely relevant and something the majority of homeowners and economists have missed. What are the contributing factors to housing affordability? Interest rates and incomes. Housing affordability is directly proportional to the balance between both and we've created a bubble in an asset class where real income growth has been marginal at best. What has fuelled housing affordability is the decrease in interest rates allowing individuals to finance larger mortgages than they would have taken on in the past. Housing values can only go up if one or two things happen: interest rates drop (allowing a larger debt to be financed) or growth of incomes (real); in this case income growth after inflation. Now we've enjoyed very tepid inflation over the past few years so income growth has been skewed when you place it in any "normal" interest rate environment. Just for argument sake put us in an environment where prime is 5%. I don't argue that the majority of time variable rate mortgages are cheaper than fixed, but faced with the data I've collected on the size & scale of this housing boom and I'll gladly take the fixed mortgage at below historical rates for the near elimination of interest rate risk.

I think as unemployment takes hold that housing prices have only one direction to go and that assumes interest rates stay where they are. Add in any situation where rates increase and there may not be a disaster, but the investment that "only goes up" is going to start sitting on its head pretty fast.


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## dogcom (May 23, 2009)

If I was buying my first house and could get a mortgage under 5% fixed for 5 years I would consider it. I lived through the 80's and seen how high rates were then and would not want to risk a interest rate spike because inflation becomes a real problem again. 

If I could get 10 years under 4% I would do it even if I lost out on an extra 1% because I was wrong and variable rates did stay lower over the term. Your house is your home and should not be gambled with in my opinion.


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## FinancialJungle (Apr 22, 2009)

The difference between VRM and fixed is less than 1% and possibly closing. I believe if you look back 5 years from now, it would not have made much of a difference which mortgage type you picked. I'd instead focus on making the extra 15% per year.


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## AshleyT (May 1, 2009)

Brad911 said:


> I don't argue that the majority of time variable rate mortgages are cheaper than fixed, but faced with the data I've collected on the size & scale of this housing boom and I'll gladly take the fixed mortgage at below historical rates for the near elimination of interest rate risk.


I think that's a fair statement. No one should argue with risk management. Just like we buy insurance (or should buy insurance) to protect ourselves from catastrophic financial losses, a fixed rate mortgage can protect you from rapid inflation and rise in interest rates (for 5 years anyway). Most of the time you pay the insurance premium, nothing catastrophic happens, and the money is lost. The insurance money has bet that you will not suffer catastrophe, and has won the bet and collects the cash from you. If a mortgagor understands that the vast majority of the time, they will pay more interest on a fixed interest rate loan than a variable interest rate loan, but choose the fixed contract because they want the protection from interest rate risk, who's to argue? However, it is important to consider that the interest rate risk does not "disappear" with a 5 year fixed contract. The risk waits for you, and then you must put your neck on the line with another decision in 5 years.



dogcom said:


> Your house is your home and should not be gambled with in my opinion.


Gambling with a house implies that you could lose your house if interest rates rise quickly. I have no doubt that this will happen to some purchasing real estate in the next few years. However, this is an error in house selection, not an error in choosing variable over fixed interest rate contracts. When purchasing a house, it is important to leave a cushion to allow for interest rates higher than what they are today. If you can no longer afford your house because interest rates went up 5%, you bought too much house. Choosing fixed over variable interest rate mortgage does not save you from this bad decision, it may just delay the point at which you have to hand over the keys by 6-12 months.


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## Cal (Jun 17, 2009)

U might find www.greaterfool.ca an interesting site to check out. Basically it is the pessimistic side in regards to the current housing market.


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## canadianbanks (Jun 5, 2009)

paulkoshy said:


> ...what must I watch out for?


Rising interest rates; let me correct myself, rapidly rising interest rates.


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