So I was recently talking with my banks about renewing my mortgage which comes up for renewal at the end of summer. After a bit of back and forth I’ve got the following offers on the table:
- Variable Rate: Prime +0.8% (3.05%), Closed, Five Year
- Fixed Rate: 3.75%, Closed, Five Year
My first thought was to go for a variable rate mortgage if I could get a cheap rate, but the banks aren’t moving on that rate. I asked can you do better than the posted rate and the answer was no. My credit isn’t a problem either, my one banker was commenting how ‘excellent’ it was.
So then I began to think about that small spread between the two rates, 0.7%, and wondered what are the odds the prime rate will go up over the next five years. Fairly damn good in my mind. With all this stimulus out there the government is going to have to watch for inflation like a hawk after we hit a recovery. I would be surprised if rates did not go up at least three times over the next five years. Then I started to look at some of the fine print. If I go fixed I can switch to the new rate now rather than wait a few months to renew. So that would save me about three hundred in interest costs.
The additional cost to go with the fixed rate is $945/year based on my current balance. So it would cost more up front, but depending on rates over the next five years I could come out ahead. I can’t know until after the five years is up which is going to be cheaper.
In the end I asked my wife her thoughts. She pointed out a fixed rate would make planning a bit easier for a few years and said her preference is for a fixed. She liked knowing what the rate is going to be.
I agreed with her points and decided to go with the fixed rate. In the end I like the concept of some certainty over the next five years and I’m willing to pay for it. It’s partly an emotional decision and I’m ok with that.
So how about you? What would you choose and why?