Personal Finance

Help deciding between two mortgages:

  • Last Updated:
  • Sep 18th, 2014 12:35 pm
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[OP]
Member
Feb 28, 2012
268 posts
31 upvotes
TORONTO

Help deciding between two mortgages:

Hi all, maybe you guys can have a look and give me some advice:

Given: Condo in a very desirable location, market value ~400K , can easily rent it out for 1700 or so plus 150 for parking = 1850$
Two mortgage offers on early renewal: 4-yr fixed 2.77 ; 5-yr variable 2.50%
Current mortgage rate is high: 3.79% - so early renewal saves a decent chunk of cash, current mortgage balance $260K

Dilemma & Consideration:
1) Still need to live in this condo until either September 2015 or September 2016.
2) If I move out on one of the above dates - can either break mortgage and sell or rent it out, if rent out can breakeven if reduce mortgage payment and still get about 9K of principal paid off per year.
3) If move out and sell : breaking variable mortgage the penalty is not that bad - few grand, for fixed rate - the IRD penalty would be over 10K
4) Variable vs. Fixed - obviously at the rates above, it would take 1 rate hike to match the fixed and variable rate.

Discuss

Thank you.
6 replies
Sr. Member
Jan 13, 2005
816 posts
67 upvotes
Montreal
hotdawg100 wrote:
Sep 17th, 2014 3:42 pm
Hi all, maybe you guys can have a look and give me some advice:

Given: Condo in a very desirable location, market value ~400K , can easily rent it out for 1700 or so plus 150 for parking = 1850$
Two mortgage offers on early renewal: 4-yr fixed 2.77 ; 5-yr variable 2.50%
Current mortgage rate is high: 3.79% - so early renewal saves a decent chunk of cash, current mortgage balance $260K

Dilemma & Consideration:
1) Still need to live in this condo until either September 2015 or September 2016.
2) If I move out on one of the above dates - can either break mortgage and sell or rent it out, if rent out can breakeven if reduce mortgage payment and still get about 9K of principal paid off per year.
3) If move out and sell : breaking variable mortgage the penalty is not that bad - few grand, for fixed rate - the IRD penalty would be over 10K
4) Variable vs. Fixed - obviously at the rates above, it would take 1 rate hike to match the fixed and variable rate.

Discuss

Thank you.
Move out right now. You bought this new condo to live in it, and it has more of whatever you want right ?
Rent your current condo while putting it on the market to sell.
Sell it if good offers. Else keep it while renting it.
It would not make sense to rent the new place and live in the current one. (unless making a buck is your goal)
10k is a lot of money for breaking a mortgage.
early renewal saves you about 2600$ a year (3.79%-2.77% = 1% = 2600$). how do they arrive at 10k ?
They usually calculate by using the current highest rate (let's say you have 2 years left), they would take the current normal, unreduced 2 year rate 3.95% then calculate the differential which gives 2% or 5200$ x 2 years = 10400$ roughly)
you don't really win in this case.

9k off principal is about 750$ monthly, which is pretty good since you still have 260k to pay.
Can you support having 2 mortgages (i.e. does your bank let you ?). Because even if you break even, you still need them to lend you the rest of the money for your second condo.
I would reduce payment and keep both condos.
I would take a fixed rate right now. that rate is insane. I took variable for 10 years and rate never went under 2.5%.
One last thing to consider:
I heard that toronto condo market is not doing great. depends on your risk tolerance. (I live in MTL so I don't know your market). If you are not feeling too great about having both during a slump in sales, then sell your current one.
[OP]
Member
Feb 28, 2012
268 posts
31 upvotes
TORONTO
thanks but couple of corrections - i won't be moving out until Sept 2015 / 2016 but when I do i will not be getting another place

10K is calculation on fee to break fixed 4 year mortgage before term if i decide to sell early, versus only 2k or so if i break 5 year variable.
Deal Addict
User avatar
Dec 8, 2010
2404 posts
851 upvotes
Why not get a 2 year variable?

I'd suggest selling now, and renting somewhere.

A good investment property grosses AT LEAST 1% of purchase price a month.

If you switch from personal to investment, bear in mind you have to pay cap gains on any value change from the date it becomes a rental to the date you sell.
[OP]
Member
Feb 28, 2012
268 posts
31 upvotes
TORONTO
daverobev wrote:
Sep 17th, 2014 5:55 pm
Why not get a 2 year variable?

I'd suggest selling now, and renting somewhere.

A good investment property grosses AT LEAST 1% of purchase price a month.

If you switch from personal to investment, bear in mind you have to pay cap gains on any value change from the date it becomes a rental to the date you sell.
I only see 3 and 5 year variable, no 2 year.

Thing is i don't want to sell because i wont be able to rent as nice of a place if i want to put away as much money every month as i pay down in principle, and i still wont mind living here for 1-2 more years.

It wont gross 1% but a i would be able to borrow heloc and invest if i rent out and still pay down mortgage and i expect condo prices to stagnate so not too concerned about cap gains
Deal Addict
User avatar
Dec 8, 2010
2404 posts
851 upvotes
Add all your costs up, inc heat, electric, maintenance, condo fees, and interest.. How much is that? Vs renting? Bearing in mind you can then invest the money currently tied up in the condo and make money from that too...

I guess if your mortgage co is only offering those two options... when does your current mortgage end? Shop around for a 2 year variable, maybe.
Deal Fanatic
User avatar
Feb 2, 2014
6342 posts
1463 upvotes
Toronto
Go with a variable mortgage. I doubt Prime rate will increase given inflation still is low. I think it will remain low for the next year at least. Also, if you do decide to keep the property, you can always convert a variable mortgage to a fixed mortgage to reduce interest rate risk. Also, if you decide to sell, the penalty on the variable mortgage will be less than the fixed.
Kevin Somnauth, CFA
Mortgage Broker - Mortgage Architects (#10287) and Real Estate Salesperson - Century 21 Innovative
President's Club Award Winner At The Mortgage Architects

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