The Mortgage Debate

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:

  1. Variable Rate: Prime +0.8% (3.05%), Closed, Five Year
  2. 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?

12 thoughts on “The Mortgage Debate”

  1. I just made the same decision. I was offered those same rates and choose to go with fixed. I know that going with variable will usually will be the best option in the long run, but for peace of mind, we went with fixed.

  2. One thing I didn’t like about fixed rates is that it also meant the payments were fixed.
    I couldn’t pay off the mortgage fast enough.
    Or do they allow you to make extra payments these days?

  3. I made that decision about 2 years ago, and ended up on a 5 year fixed at 5.09%. So far it would have been much better to go for the variable, but who know what will happen over the next 3 years. Hopefully things don’t go to crazy and come 3 years from now things will be hovering back near the 5% range or lower. If not, maybe I’ll switch to the variable depending on how things are looking at the time.

  4. this is really a no-brainer. Rates are supposed to hold until june of 2010 (according to the bank of Canada a few weeks ago) after that there’s almost a 0% chance that they will go down, if they go up even 0.25% you’ve already made the right decision.

    I got really lucky and picked up a variable rate last september for prime – 0.76% for 5 years. My current rate is 1.49% !!! pretty incredible. But if I were signing up for a new mortgage now, fixed at 3.75 for 5 years would be the way to go. I would even consider fixed at 4. something for 10 years if it were offered.

  5. @Hazy:

    Yes, you can still make extra payments on most fixed rate options. I am with RBC and I can make up to double my payment every month as well as 15% annual anniversary lump sums. With my existing term, I can also skip a month (should I ever need to) for every double up-payment I made. I can make two double up payments and consider those part of my emergency fund. If I don’t use those two months, they save me interest payments, if I need them in case of a sudden job loss etc, I can skip an equivalent number of months.

  6. It’s funny you’re posting about this today as I was just helping a friend out with some mortgage calculations.

    Firstly RBC, TD & BMO offered my friend 3.65% so ask your bank to match that.

    I was helping my friend decide between a 5 year fixed at 3.65% or the 10 year fixed at 5.25% … I too believe that inflation is going to be a serious concern 3-5 years out and that interest rates will be a good deal higher. If inflation is in the 6-9% range it’s very possible that when your 5 year term is up you’ll be renewing at a new 5 year rate that is higher than 7% … if that is the case then the 10 year 5.25% makes the most sense from a long term planning approach.

    As rates have nowhere to go but up in the next 5 years I think it’s safe to assume that going variable right now is not the right move!

    Look into a 10 year … run the numbers, it might be a better option!

  7. FT,

    I plan to pay off the mortgage in about six years or so. I’m going to keep investing for another year or two and then switch gears to killing off that mortgage as fast as possible.

    Everyone else,

    Thanks for the links and stories of other people’s decisions. It’s always interesting to see what how everyone would handle something like this.

    Tim

  8. AdamW, I thought the same thing about the 10 year at this point but the fine folds over at Canadian Mortgage Trends set me straight. You can take a look at their post over at http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2009/05/fixed-mortgages-10-year-vs-5-year.html

    To sum it up, if the spread between a 5 year and 10 year rate is 1.5% the 10 year historically only came out better than the 5 year about 6% of the time. Now, this may be one of those times, but that’s not very good odds.

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