# Help with fixed, variable or HELOC for our next home purchase? Please?



## Addy (Mar 12, 2010)

We will be purchasing a house over the next four months or so. I’m having trouble determining which is the best mortgage option for us. I spoke with a Mortgage broker who is familiar with military moves (we’re a military family, being posted to a new location). Here are the options we have so far, if anyone would kindly comment I’d appreciate any input.

1.	Conventional Mortgage, 5 yr term amortized over 20 or 25 years, after interest rate buy down (if we use $ left in our funding/move envelope to buy down a mortgage interest rate, the money is tax free, as opposed to cashing it out and it becomes taxable) we would get a rate of about 3.27% (4.04% less the buy down). I think 4.04% seems rather high.
a.	Considerations:
i.	According to the Broker I spoke with, only certain lenders allow portability without restrictions (I can list all of them, but a few are ING, Scotia Mortgage Authority, Concentra). ( I became overwhelmed speaking with the Broker and the restrictions on portability didn’t sink in… I have to check again into this).
ii.	We will only be at our new house most likely for about three years or so, which means we would have to break the 5 yr term early.

2.	Variable Rate Mortgage: Not sure what rate we would get, but I’m confident it would 2.5% maximum. We could go with variable (we can’t do the interest rate buy down on a variable) as it’s a lower rate than the 5 yr fixed, and simply cash out the funding envelope money (and pay taxes on it).
a.	Considerations: Most likely we’ll only be in our new house for three years or so, and I’m not sure what the penalties are for breaking a variable rate mortgage are. Are they similar penalties as breaking a fixed rate?

3.	HELOC: We can get a HELOC which would allow us flexibility as we wouldn’t have the pressure to sell our current house before buying the new house (we’re currently mortgage free) but I’m a bit leary about HELOC’s as I don’t know a lot about them, and I understand there has been some changes recently.


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## K-133 (Apr 30, 2010)

Addy said:


> We will be purchasing a house over the next four months or so. I’m having trouble determining which is the best mortgage option for us. I spoke with a Mortgage broker who is familiar with military moves (we’re a military family, being posted to a new location). Here are the options we have so far, if anyone would kindly comment I’d appreciate any input.
> 
> 1.	Conventional Mortgage, 5 yr term amortized over 20 or 25 years, after interest rate buy down (if we use $ left in our funding/move envelope to buy down a mortgage interest rate, the money is tax free, as opposed to cashing it out and it becomes taxable) we would get a rate of about 3.27% (4.04% less the buy down). I think 4.04% seems rather high.
> a.	Considerations:
> ...


Re: 1.

You should be able to get between at least 3.85% depending on your credit. That 0.2% adds up over the long run, but shouldn't be a disruption to your cashflow.


Re: 2. 

You can probably get as low as prime minus 0.8% (2.2% with most banks today) on a variable rate mortgage. The penalty on a variable rate mortgage is always 3 months worth of interest.


Re: 3. 

Scotiabank has a product called something like the Total Scotia Home Equity Plan. Basically, assuming you put down 20%, all of you principle payments provide you with an equivalent amount of line of credit space i.e. As you pay down the principle, the line of credit grows. 

http://www.scotiabank.com/cda/content/0,1608,CID13592_LIDen,00.html


The interest on a HELOC is usually around prime plus 1%. If you're fairly sure you'll be moving, and prefer the stability I'd go with a bank that allows porting, and a fixed rate. If you don't mind the risk of rising interest rates, go variable. 

Either variable or fixed, if other banks offer a similar product to Scotiabank, then a product such as that may provide the flexibility you're looking for.


I'm considering porting a mortgage right now. And though the rate is not great compared to what I can get today, I can attest that the option is nice to have.


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## Rico (Jan 27, 2011)

Just to clarify some terminology here (unless these are different regionally or something); there are open mortgages and closed mortgages. Within either open or closed mortgages, you can have fixed or variable rates. Then, there is the term of the mortgage: 6 months, 1, 2, 3, 5 years, etc.

An open mortgage can be paid off whenever you want. Rates (fixed or variable) are usually a bit higher for that privilege. Closed mortgages involve a commitment to hold the mortgage for the length of the term. Rates (again, fixed or variable) tend to be a bit better because the bank has more guarantee of income. However, you pay a penalty of the higher of "3 months interest" or "an IRD (interest rate differential)" if you close the mortgage before the term is up.

Why not just get a 2 or 3 year term if you're moving in 3 years?


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## GeniusBoy27 (Jun 11, 2010)

I agree with Rico. If you're going to buy, why don't you get a 2 or 3 year term (with it's lower interest rates presently). If you look at www.ontarioequity.com, the current 3 year rate is 3.33%.

I'm not sure why you're buying though, if you plan to move in 3 years. Wouldn't it be smarter to rent, rather than go through the hassle of buying and selling?

HELOC's are relatively easy. I have a prime + 0.5% on mine, which can help with a temporary cash flow. You may need to pay a fee (I don't, because of the amount of business I do with my bank) though to set up the HELOC. But ask your bank.


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## Dana (Nov 17, 2009)

GeniusBoy27 said:


> I'm not sure why you're buying though, if you plan to move in 3 years. Wouldn't it be smarter to rent, rather than go through the hassle of buying and selling?


+1

When you include the monetary costs of buying and then selling again in 3 years, is it really worth it to buy? Maybe you would be further ahead renting and investing the proceeds of your current home?


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## Addy (Mar 12, 2010)

I can see why people are offering up the option to rent when we're only there for three years or so, but in reality, thats life... if we never bought because we are moving in a few years, we would not have $175K in equity built up so far.

Besides that, there are very, very few decent rentals where we are moving, and what is available is extremely expensive to rent. The military houses are not up to my standards (they are frankly gross) and we would pay more to rent a military house than we would having a mortage on a new home.

And thirdly, we pay no moving expenses, no lawyers fees, and any relator fees we pay for the sale of our current home is covered. Buying is a hassle in the sense of looking for a house, but no more hassle than renting is, and we don't have to deal with a landlord. I'm sure some people will still think we're crazy for buying, but in the end, it's our decision and we're planning on buying.


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## Dana (Nov 17, 2009)

Addy said:


> I can see why people are offering up the option to rent when we're only there for three years or so, but in reality, thats life... if we never bought because we are moving in a few years, we would not have $175K in equity built up so far.
> 
> Besides that, there are very, very few decent rentals where we are moving, and what is available is extremely expensive to rent. The military houses are not up to my standards (they are frankly gross) and we would pay more to rent a military house than we would having a mortage on a new home.
> 
> And thirdly, we pay no moving expenses, no lawyers fees, and any relator fees we pay for the sale of our current home is covered. Buying is a hassle in the sense of looking for a house, but no more hassle than renting is, and we don't have to deal with a landlord. I'm sure some people will still think we're crazy for buying, but in the end, it's our decision and we're planning on buying.


I get it. If the transaction costs of moving are absorbed for you by the military, then I get why you would rather own than rent. 

That being said, if you think the prime rate will be stable or only increase minimally over the next 3 years, then a HELOC will give you the most flexibility. If you are concerned about rates increasing, you could look at a 3 year closed or a 5 year closed but read the portability clause carefully.


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## GeniusBoy27 (Jun 11, 2010)

I get it too, if you don't have to absorbe the housing costs, but I will say that to expect to build equity, would also be a mistake. In general, average housing prices will probably stay flat. My point would be, don't focus on housing as an equity builder over the next few years. With increasing interest rates, in general, housing prices may go down or may at best be flat over the short term, and within a 3 year-window, there is a risk of a loss in overall equity. But having said that, I did something similar to you many moons ago, with the acknowledgement that I had my own nice clean house to live in, close to the medical school. I took a loss, but don't regret it for one second with the number of hours I saved in getting to school and being able to run home for lunch.


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## Addy (Mar 12, 2010)

Yes, buying RE is a risk, for sure. I think in our case, like I mentioned the rentals we could get are crappy and overpriced (more expensive than a reasonable mortgage payment), so in this instance we're probably better off owning even if there is a downturn. We had considered investing the $175K from the sale (or whatever we get) and renting a military house, but it's tough to swallow renting a crappy house after living in a nice house for so long 

The two most reasonable looking options for mortgages so far seem to be 3.35% fixed for 3 years, or 2.1% variable for 5 years with a penalty of three months interest only (which we would be reimbursed for from the military when we do eventually sell this new house). Not sure which is best for us, frankly both are attractive.


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## Plugging Along (Jan 3, 2011)

I'm not sure if this has been mentioned, but why not an open variable? It may be a slightly better rate than the HELOC, and you can port it, move it, pay it all off any time.


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## m3s (Apr 3, 2010)

The advice here is all sound but it just doesn't apply to the military situation. I recommend you get one of the few mortgages that honours the DND clause. This means you can take a mortgage as if you were staying, and if you get posted (ordered to move for military duty) they will let you break the term with only the covered 3 months interest penalty.

In my experience the lenders that offer the DND clause are the same ones that beat all the big bank rates. The big banks will let you port but you have to blend with whatever their current market rate  is at the time, no negotiating down. There is a cost to open mortgages so that is why we have the DND clause. I agree that it's all overwhelming and I'm sure it's purposely overcomplicated so that way so we pay someone to decipher it for us 

The question between fixed and variable is a tough one. There is a cost to having the safety of a fixed and and we can get it slightly lower with the interest buydown. Really the variable is probably still cheaper, baring that rates do not increase. No one has a crystal ball. I've heard there is a way to take 2 mortgages and do both, as mortgage interest buydown only applies on the first $25k borrowed anyways

Remember you also have home equity protection in case you get posted during a RE crash, so it's kind of a no brainer to buy unless you don't have a downpayment or good credit etc. Also if you rent out 50% of your house, you do lose 50% of all these entitlements


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## Addy (Mar 12, 2010)

Plugging Along, I hadn't really thought of that, but it makes sense, especially if we end up not selling our current house before buying our next home.... then we could simply apply the proceeds from the sale directly to our new mortgage. I'll have to check into rates for open mortgages. HELOC's seem to be prime +1. which isn't bad, but an open variable may make more sense - I'm just not sure what the differences are from an open variable and a HELOC, they seem quite similar.


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## Addy (Mar 12, 2010)

modesour you reminded me about the portability and only having the option to blend and extend at the posted rate... I'll have to ask about that, and get some assurances built into our contract if I'm told they will give us their best rate (or whatever the others with the DND clause offer). Thanks for pointing that out.

A few things I've found out just recently (as in the last day or two) are that variable mortgages are almost all (if not all) 3 month interest penalty. So we could take a variable, cash out the funding envelope (taxable of course) and still do well. Gambling, yes, but I'm confident enough the rates won't go up drastically over the next three years to take that gamble.

Or we could go with a lender that either has the DND clause, or, one of the few (ie two, maybe some I'm not aware of) that have 3 month interest only penalty to anyone (not just DND) even for fixed terms. I think the more difficult option to get is the portability without restrictions... but again I haven't asked around enough yet to verify this.

I think you're thinking of the home relocation loan for $25K maybe? There is a way of having that as a second mortgage and still buying down the interest rate (only can be brought down to the CCRA's prescribed rate which luckily right now is really low, I think 1% or so), but that means the hassle of that second mortgage, and I imagine Firstline / HLC will nail it to us if we break that second mortgage somehow... even though the interest has already been prepaid by the DND. I'll still look into this, because it would be nice to have a variable rate mortgage on a 5 yr term (with 3 month penalty and portability without getting nailed with the posted rate) and the second mortgage of no interest $25K for 5 yrs..... hmmm....

When we had a mortgage on the house we're in right now, it was a 5 yr term at 0.85%... yes, less than 1%... it was sweet!


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## m3s (Apr 3, 2010)

I think the main thing is avoiding IRD if you're moving in 3 years. Variable is probably better than fixed, take the leftover cash and put it in RRSP if you have the room. Anyways I'll be renting for 4 years, I can only hope the houses aren't all $1,000,000+ when I come back 

If your rate is so low, and your current house sells afterwards, why not diversify in some other investments? You can usually pay down 20% per year as the standard with closed anyways. Taking out a HELOC is kind of backwards isn't it when you have the opportunity to take a bigger mortgage at a lower rate when you buy? I'd buy some East coast farmland or something, you know it outperforms gold historically? Everyone has to eat


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## Plugging Along (Jan 3, 2011)

An open variable shouldn't have the 3 month penalty. That's why you're getting a slightly higher rates.


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## m3s (Apr 3, 2010)

Yea but we're entitled to 3 month penalty on a posting, so I'd rather take the lower rate with a good pre-payment plan like 25% or 20%/year


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## Plugging Along (Jan 3, 2011)

For the OP though, it seems to be having the greatest amount of the flexibility is the first criteria. That's why an open variable would be a better option than a regular closed, especially if there is a higher probability of them moving in under the 5 year term. Any savings they would get from a closed would be lost in the 3 month penality.

If they did not need the flexibility, then there would be no need for the fully open.


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## Addy (Mar 12, 2010)

That is true, we will need the flexibility if our current home doesn't sell in the time expected. The chances of that happening are slim, but still, I like to be prepared..... so in this case we may look at an open mortgage, or have considered renting the house out, but I'm not too keen on that second option.

If our house does sell, (or even regardless), we still need to make sure we're not paying huge penalties when/if we have to break the term - this is what modesour is pointing out... as the IRD can be thousands of dollars, and not reimbursed by my husbands employer when we move again most likely in three years.

Another option is that ING allows up to 25% extra payment per year... thats also an option, to simply get a regular term (fixed or variable) mortgage and just pay the 25% as soon as we can once our house sells, then another 25% again as soon as the timelines allow. That would be 50% of our purchase, and our house most likely will be around $300K or so.... so our $175 would nearly be eaten up by the 2nd 25% payment.

Thank you to everyone who has offered up their advice, it's really helped me understand my options... still haven't decided which option we're going with, but at least I know more what is available.


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## m3s (Apr 3, 2010)

Plugging Along said:


> For the OP though, it seems to be having the greatest amount of the flexibility is the first criteria. That's why an open variable would be a better option than a regular closed, especially if there is a higher probability of them moving in under the 5 year term. Any savings they would get from a closed would be lost in the 3 month penality.
> 
> If they did not need the flexibility, then there would be no need for the fully open.


I agree but as I mentioned before the OP is entitled to 3 months interest penalty being covered already so the extra cost is moot in this case, might as well take the cheaper closed IMO

It seems like closed variable is the cheapest baring the rates stay down. I'm guessing HELOC rates are slightly higher than a variable mortgage? If so it would be smarter to take a bigger mortgage rather than HELOC, but if not you could take the smallest mortgage and a HELOC. Even if you sell your 1st house later and 25%/year isn't enough, you can probably find a better place to put the leftover money with mortgage rates so low


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## Plugging Along (Jan 3, 2011)

mode3sour said:


> I agree but as I mentioned before the OP is entitled to 3 months interest penalty being covered already so the extra cost is moot in this case, might as well take the cheaper closed IMO
> 
> It seems like closed variable is the cheapest baring the rates stay down. I'm guessing HELOC rates are slightly higher than a variable mortgage? If so it would be smarter to take a bigger mortgage rather than HELOC, but if not you could take the smallest mortgage and a HELOC. Even if you sell your 1st house later and 25%/year isn't enough, you can probably find a better place to put the leftover money with mortgage rates so low


Sorry, I some how missed the part about the op having the interest rate penalty covered for 3 months. If that's the case, then the closed would be better, assuming it has the pay down option. HELOCs are usually slightly higher than the open variable.


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