Personal Finance

Pundits say Lock in. would you?

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  • Apr 7th, 2012 10:23 pm
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Member
Jun 2, 2006
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Newmarket

Pundits say Lock in. would you?

I have 4 years left on a prime -.9% mortgage.

I am paying an extra $600 a month on top of the normal payments, with a balance of 350k.

I am inclined to stick with the variable instead of locking in around 3.1%.

Am I wrong and the pundits right?
28 replies
Deal Fanatic
Mar 24, 2008
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Prime - 0.9% is an excellent deal. You'll save a lot of money over the next few years. Just stick with it and don't listen to people who tell you to lock in.
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Feb 15, 2008
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Rates are likely on their way down (ie: BoC's policy rate) due to the impending deflation of housing and the economy generally. However, that's not to say that such low rates will actually be available to housing-secured borrowers.

So its really tough to figure where things are going. Economists might say "interest rates are going down", or "interest rates are going up", but unless they make it very clear how this applies to 'retail' borrowers, such advice isn't all that useful.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Dec 26, 2010
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redbulldrinker wrote: I have 4 years left on a prime -.9% mortgage.

I am paying an extra $600 a month on top of the normal payments, with a balance of 350k.

I am inclined to stick with the variable instead of locking in around 3.1%.

Am I wrong and the pundits right?

No one here is going to give you advice any better than a pundits. Really the answer to which is better is guessing what the future holds. Both rates are good. One is locked, One isn't. Either move is a gamble on what will happen in the future.
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Mar 24, 2008
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Mark77 wrote: Rates are likely on their way down (ie: BoC's policy rate) due to the impending deflation of housing and the economy generally. However, that's not to say that such low rates will actually be available to housing-secured borrowers.

So its really tough to figure where things are going. Economists might say "interest rates are going down", or "interest rates are going up", but unless they make it very clear how this applies to 'retail' borrowers, such advice isn't all that useful.

OP has prime -0.9% for the next four years. The rates will have to go up a full 1% just to break even with the 3.1% he was offered. Also, keep in mind that the may be penalties to break existing mortgage. It is definitely not worth it IMO as rates are not expected to rise for another year.
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Jun 7, 2001
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IMO, the answer depends on how you sleep at nights. If you are always worried about prime increasing in the next four years (i.e. sleepless), then lock it in. If you are not worried about prime, then leave it as is.

Dave
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Feb 15, 2008
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ksgill wrote: OP has prime -0.9% for the next four years. The rates will have to go up a full 1% just to break even with the 3.1% he was offered. Also, keep in mind that the may be penalties to break existing mortgage. It is definitely not worth it IMO as rates are not expected to rise for another year.

Prime could go up 1%, even as the BoC keeps interest rates the same or even reduces them. That's the point I was making -- there is nothing that fixes "Prime" at a certain rate. "Prime" is set at the discretion of the bank that writes the loan.

As I've posted on numerous other occasions, banks could easily just raise Prime by 1, 2, maybe even 5%, and then offer new customers even bigger discounts against Prime. Effectively re-pricing loans across the board. Customers could leave, but they'd be hit with the prepayment penalties.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Mar 24, 2008
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Mark77 wrote: Prime could go up 1%, even as the BoC keeps interest rates the same or even reduces them. That's the point I was making -- there is nothing that fixes "Prime" at a certain rate. "Prime" is set at the discretion of the bank that writes the loan.

As I've posted on numerous other occasions, banks could easily just raise Prime by 1, 2, maybe even 5%, and then offer new customers even bigger discounts against Prime. Effectively re-pricing loans across the board. Customers could leave, but they'd be hit with the prepayment penalties.

Could, should and would are all speculations at this point. A 1% increase (whenever it happens) would have him break even. Anything more and he could break his mortgage... why do it now? I am not even factoring in the penalties he would pay to go with the new rate.

Historically speaking, variable rates have beaten fixed rates over the last little while.

http://www.canadianmortgagetrends.com/c ... tives.html
When deciding between a fixed or variable rate, people often turn to the most quoted research on the topic: that done by Dr. Moshe Milevsky.Dr. Milevsky found that 77%-90% of the time people pay less interest over the long-run by choosing a variable-rate mortgage.* (See CMT’s April 2008 story entitled*Fixed or Variable Mortgages – Research Update)
http://www.canadianmortgagetrends.com/c ... ariab.html
Newbie
Apr 1, 2012
13 posts
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VANCOUVER
I would lock in at 3.1% fixed. When inflation starts picking up again you'll thank yourself 1000x
Deal Addict
Jan 11, 2004
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This is why generic advice is only mostly applicable. If you have a prime -0.9 mortgage, there is very little incentive to lock in. The way that I look at it is the bank isn't in the business of giving money away. In their best estimate the average effective interest rate over the next 5 years will be x. Then they add a profit margin of y and x+y is the current 5 year mortgage rate.

It is very, very hard to beat a prime -0.9 mortgage. There is a reason why variable rate mortgages are at or just under prime these days...
Newbie
Apr 1, 2012
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GonePostal wrote: This is why generic advice is only mostly applicable. If you have a prime -0.9 mortgage, there is very little incentive to lock in. The way that I look at it is the bank isn't in the business of giving money away. In their best estimate the average effective interest rate over the next 5 years will be x. Then they add a profit margin of y and x+y is the current 5 year mortgage rate.

It is very, very hard to beat a prime -0.9 mortgage. There is a reason why variable rate mortgages are at or just under prime these days...

I agree with your point that Prime -0.9 is great at moment, but the incentive is to lock in at a little over current Prime and guarantee your payments for the rest of your mortgage. Otherwise what good is Prime -0.9 a few years from now when Prime is in double digits? Prime really can't get much lower and even fixed rate just above Prime is historically a GREAT rate. There's not much upside and lots of downside to saving a few percentage points in interest for next 12 months with so much interest rate uncertainty going forward. But to each their own!
Deal Expert
Jan 27, 2006
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Vancouver, BC
DavidY wrote: IMO, the answer depends on how you sleep at nights. If you are always worried about prime increasing in the next four years (i.e. sleepless), then lock it in. If you are not worried about prime, then leave it as is.

Dave

+1

A good night sleep is worth it!
Newbie
Apr 1, 2012
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VANCOUVER
DavidY wrote: IMO, the answer depends on how you sleep at nights. If you are always worried about prime increasing in the next four years (i.e. sleepless), then lock it in. If you are not worried about prime, then leave it as is.

Dave

Agree, all comes down to your personal risk/reward tolerances.
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Mar 24, 2008
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canuckssedin wrote: I agree with your point that Prime -0.9 is great at moment, but the incentive is to lock in at a little over current Prime and guarantee your payments for the rest of your mortgage. Otherwise what good is Prime -0.9 a few years from now when Prime is in double digits? Prime really can't get much lower and even fixed rate just above Prime is historically a GREAT rate. There's not much upside and lots of downside to saving a few percentage points in interest for next 12 months with so much interest rate uncertainty going forward. But to each their own!

He has prime - 0.9 for the next four years and if he locks in, he will have 3.1% for 5 years. Hardly worth taking a chance with interest rates not projected to rise for another year.

He'll end up paying penalty to break his current mortgage and this further reduces the incentive to lock in. Read the article I posted above. A study looked at variable vs fixed rates between 1957-2008 and it clearly showed that variable rate was better 77-90% of the time.

I cringe when I hear people locked into fixed rates just to have that "one payment that doesn't change for 5 years". You're paying a high rate to begin with! Banks are not idiots and interest rate risk is calculated into the fixed mortgage rate they gave you!
Deal Expert
Dec 5, 2006
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Markham
ksgill wrote: He has prime - 0.9 for the next four years and if he locks in, he will have 3.1% for 5 years. Hardly worth taking a chance with interest rates not projected to rise for another year.

He'll end up paying penalty to break his current mortgage and this further reduces the incentive to lock in. Read the article I posted above. A study looked at variable vs fixed rates between 1957-2008 and it clearly showed that variable rate was better 77-90% of the time.

I cringe when I hear people locked into fixed rates just to have that "one payment that doesn't change for 5 years". You're paying a high rate to begin with! Banks are not idiots and interest rate risk is calculated into the fixed mortgage rate they gave you!

I agree to your other points. just not sure penalty. If OP switches to other banks, he will pay penalty,but if just sticks to current bank,probably no penalty? I don't know, never tried. If switching is a good deal for banks,they should encourage that?
Member
Feb 25, 2009
300 posts
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Mirabel
Penalty to break a variable rate, is far less than for a fixed rate.
OP should call his bank, and ask what his penalty is to make an informed decision.

Quote from PaulMeredith : On terms 5 years or less, the penalty is ALWAYS the greater of three months interest or the IRD on fixed rate mortgages. It doesn't matter what lender you are dealing with, although some lenders calculate their IRD based on posted rates (such as all chartered banks) or bond yields (such as Industrial Alliance) which can both significantly increase the amount of your penalty. There are no banks or other lenders that would waive this penalty or not apply the IRD. If it is a variable rate mortgage, then it is almost always 3 months interest. The only way to have a penalty 'waived' would be for the lender to work it into the rate (if refinancing with the same lender).
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Mar 24, 2008
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smartie wrote: I agree to your other points. just not sure penalty. If OP switches to other banks, he will pay penalty,but if just sticks to current bank,probably no penalty? I don't know, never tried. If switching is a good deal for banks,they should encourage that?

I was in a similar situation with TD a while back and I distinctly remember paying penalty for the lower rate that I got through the same bank.
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Mar 24, 2008
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dcaron9999 wrote: Penalty to break a variable rate, is far less than for a fixed rate.
OP should call his bank, and ask what his penalty is to make an informed decision.

If you have a 10 year mortgage and need to break it anytime after the 5 year period, then it will be just a three month interest penalty. If you were to break earlier than the 5 year period, the interest rate differential will only apply if the current rate is LOWER than the rate you are paying. So if you are paying 4% and the new rate for 10 years is 6%, the next person that the bank lends that money to will pay the 2% difference, as they are paying 6%. Does that make sense? If you were paying 4% and the new rate was 3%, then the bank would have to re-lend that money out for a lower return, hence the reason for the IRD.
My understanding is that OP has a 5 year variable mortgage, therefore, he will incur penalty that is more than 3 months worth of interest. Not worth it IMO.
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Jul 29, 2007
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I would definitely stick with your prime - 0.9, rates aren't expected to move up for at least a year and you'd have to move up 1% before you would even break even at 3.1%.

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