Real Estate

1.35 variable or 1.99 fixed both for 5 years with 283K - Help calculate

  • Last Updated:
  • Jun 8th, 2021 12:05 pm
[OP]
Jr. Member
Sep 19, 2010
111 posts
1 upvote

1.35 variable or 1.99 fixed both for 5 years with 283K - Help calculate

Hi,

I am in the processes of signing up with Questrade for 5 years fixed at 1.99% - mortgage balance 283K

After reading a lot of posts about variable rates, interest rates mostly lockdown until 2023 etc. I think I should be considering variable rates.

I will be saving considerably on the interest payments and pay more towards the principal.

I will be paying $150 - $200 more per month than the required amount.

Also, I am currently with TD; they are trying to keep me by offering 2.05% for 5 years and 1.45% for variable.

My biggest concern is interest rates increases starting in 2023 (I read the government will have no raises until 2023). Will the variable rate catch up or cross the 1.99% fixed rate? How soon or how many interest rate increase would it take?
I couldn't figure out how to calculate it.

If there are increases; in the 5 year term; will I save more with a variable or fixed (in my scenario)?

Looking for help to understand it.

btw I have never carried a variable mortgage in the past.

Thanks
25 replies
Deal Addict
Feb 4, 2010
4679 posts
3511 upvotes
I got similar rates from my lender - I chose 1.45% variable.
Jr. Member
Feb 10, 2021
105 posts
67 upvotes
lessca wrote: Hi,

I am in the processes of signing up with Questrade for 5 years fixed at 1.99% - mortgage balance 283K

After reading a lot of posts about variable rates, interest rates mostly lockdown until 2023 etc. I think I should be considering variable rates.

I will be saving considerably on the interest payments and pay more towards the principal.

I will be paying $150 - $200 more per month than the required amount.

Also, I am currently with TD; they are trying to keep me by offering 2.05% for 5 years and 1.45% for variable.

My biggest concern is interest rates increases starting in 2023 (I read the government will have no raises until 2023). Will the variable rate catch up or cross the 1.99% fixed rate? How soon or how many interest rate increase would it take?
I couldn't figure out how to calculate it.

If there are increases; in the 5 year term; will I save more with a variable or fixed (in my scenario)?

Looking for help to understand it.

btw I have never carried a variable mortgage in the past.

Thanks
variable. not familiar with this ~2023 rate increase or where thats coming from. However, take advantage of contributing considerably more towards your principal for the next ~2 years and if you do see spike coming it will take 1 or 2 rate increases for your rate to go above 2%. At which point, you could always go in and lock it at the best fixed rate.
Deal Addict
User avatar
Nov 30, 2005
1034 posts
427 upvotes
Ottawa, ON
The spread is .64 and can be closed quite quickly, 2-3 rate increase of .25 each. No guarantee that they will wait until 2023 as they may do it sooner. If you're worried, get the fixed. However unless your credit rating is low, i think you can get as low as 1.1-1.25 on the variable. Talk to a few brokers here.
Jr. Member
May 2, 2020
181 posts
205 upvotes
Toronto
ZxExN wrote: The spread is .64 and can be closed quite quickly, 2-3 rate increase of .25 each. No guarantee that they will wait until 2023 as they may do it sooner. If you're worried, get the fixed. However unless your credit rating is low, i think you can get as low as 1.1-1.25 on the variable. Talk to a few brokers here.
2-3 rate increases is almost a years worth of point increases.

OP still comes out ahead with the variable rate, and I’m sure if I sat down and did the numbers it’s “not even close”.

That extra $200 from the fixed rate could go into paying down additional principal each month and if rates go up OP is still way in the green than if they took the fixed rate and let their hard earned money get eaten by interest.
Blessed are the flexible, for they shall never be bent out of shape
Deal Addict
Nov 13, 2013
2766 posts
1467 upvotes
Ottawa
Azmosis30 wrote: 2-3 rate increases is almost a years worth of point increases.

OP still comes out ahead with the variable rate, and I’m sure if I sat down and did the numbers it’s “not even close”.

That extra $200 from the fixed rate could go into paying down additional principal each month and if rates go up OP is still way in the green than if they took the fixed rate and let their hard earned money get eaten by interest.
This is simply not true. In 5 years we can do the numbers. Nobody can predict much beyond 6 months. Yes the majority and most central bank opinion, at least publicly, is inflation is a blip /rates will stay low at less until 2023 when slow rises will return us to normal interest rates. A minority opinion including some top investors says we are entering a period of increased inflation. We have not seen this for more than 30 years so many think it’s impossible. If we see sustained inflation above 5% the bank will act to cripple it as soon as they believe it’s real. Rates could go up 3% in a year. If that doesn’t work all bets could be off. Yes this will destroy the housing market but inflation destroys everything so would have to be stopped.

In terms of OPs decision. Yes variable is likely to save money and if you are paying it down quickly it is even more likely. As long as 2% increase in last half of term won’t bankrupt you it’s a safe choice to go with variable.
Newbie
Oct 1, 2012
52 posts
31 upvotes
Kitchener
ZxExN wrote: The spread is .64 and can be closed quite quickly, 2-3 rate increase of .25 each. No guarantee that they will wait until 2023 as they may do it sooner. If you're worried, get the fixed. However unless your credit rating is low, i think you can get as low as 1.1-1.25 on the variable. Talk to a few brokers here.
I am renewing next month, and my choices are 1.79 fixed vs Prime-1.20, or 1.25% from RMG. Two rate increases and the benefit of variable is wiped out so I am tempted to go with the fixed rate. Last time I gotr a variable was 2010, and had three rate increases in 4 months (June, July, September).
Sr. Member
Dec 19, 2009
946 posts
614 upvotes
Ottawa
Don’t forget the hefty penalties with a fixed mortgage. About 70% of people change or break their mortgage within a 5-year term.

The way I look at it is in most instances you are paying a premium for the fixed rate (and the peace of mind that comes with that).
Deal Addict
Nov 13, 2013
2766 posts
1467 upvotes
Ottawa
Azmosis30 wrote: If you think rates will go up 3% in a single year coming out of a pandemic with the massive amount of debt both the federal and provincial governments have incurred. You then need to stop reading into the extreme levels of fear mongering with the minority crew that you are referring to.

Based on historical data which you like to reference

Variable has beaten fixed in the past what… 50 years? Except for maybe one or two instances if I’m correct?

I rather look at hard facts and trends rather than fear monger myself into a worst financial situation.

But I see where you are coming from. I simply just do not subscribe to it.
I always go variable for primary residence and rentals. But I don’t over borrow so I’m comfortable with some risk. Rates have been on a downward trend for 30 years so naturally variable almost always has prevailed. It’s not a certainty though. In 80s banks raised rates by full points at a time as inflation was out of control. Markets say this is a 10-20% outcome. 10% is probably the same chance of a 30% drop in housing prices. That doesn’t mean you don’t buy but if you are stretching to a third property with 25% equity in each you are risking being bankrupt.

The government debt actually makes interest rates more likely to increase. There is a lot of confusion that the government decides interest retest we have separated those functions to make sure people trust our central bank to fight inflation. They will do this if required and consequences for government debt be dammed. As Martin was fighting the deficit in 94 and 95 interest rates went up almost three percent in 6 months. The subsequent budget was Armageddon as the higher rates meant we were broke. Inflation was only edging above 2 % but recent inflation had been so high we were scared and US rapid growth caused higher rates there we had to match. Hmm sound familiar ?

You’re right though the gold bug/ alt right conservative/ panicked folks are exaggerating the inflation risk for their own purposes.
Deal Addict
Jan 15, 2017
4117 posts
3620 upvotes
OP, you are asking people to run what scenarios that actually accomplish very little.

As mentioned by a previous poster, the spread between the two is only 0.65%. That can be eliminated in a couple of rate increases. Don't assume that if interest rates increase that it will only be in 0.25 increments. There is nothing stopping increases above 0.25.

The school of thought in the variable vs fixed rate debate is that over the long term of a mortgage a variable rate mortgage generally comes out ahead of a fixed rate. But, as no one can predict the future we can also say that past performance is not an indicator of future performance when it comes to mortgage interest rates.

Perhaps you should answer the question of how will you feel if you decide to go to variable and interest rates start to rise? Will you stress about it? Will you lose sleep? Will you kick yourself for making that decision? Fact is when comparing historical fixed mortgage rates 1.99% is an exceptional rate. If you are the type of person who would rather make a decision and then forget about it for another five years then you should seriously consider the fixed rate and know that it is a good choice for you.
Deal Addict
Feb 4, 2010
4679 posts
3511 upvotes
skeet50 wrote: OP, you are asking people to run what scenarios that actually accomplish very little.

As mentioned by a previous poster, the spread between the two is only 0.65%. That can be eliminated in a couple of rate increases. Don't assume that if interest rates increase that it will only be in 0.25 increments. There is nothing stopping increases above 0.25.

The school of thought in the variable vs fixed rate debate is that over the long term of a mortgage a variable rate mortgage generally comes out ahead of a fixed rate. But, as no one can predict the future we can also say that past performance is not an indicator of future performance when it comes to mortgage interest rates.

Perhaps you should answer the question of how will you feel if you decide to go to variable and interest rates start to rise? Will you stress about it? Will you lose sleep? Will you kick yourself for making that decision? Fact is when comparing historical fixed mortgage rates 1.99% is an exceptional rate. If you are the type of person who would rather make a decision and then forget about it for another five years then you should seriously consider the fixed rate and know that it is a good choice for you.
Good points. I actually signed my renewal for a fixed rate at 1.99% back in March but things have changed and I might need to sell/move within the 5 years. I inquired with the lender and they're still offering 1.45% variable. I haven't signed yet but I think in my situation it might be worth to go with variable for the only that that I might end up selling - savings wise it's not worth it as I'm only saving a little over $3k if rates don't go up.

I'm open other perspectives if anyone has any as to what do in my situation. I should also mention I'm with a mono lender and their break penalties are much lower than the banks.

Does anyone know how accurate these calculators are? The break penalty is quite low so now I'm thinking maybe I should stick with the fixed https://www.ratehub.ca/penalty-calculator
Sr. Member
May 20, 2017
882 posts
605 upvotes
ON
With the inflation rate keeps going up, BOC is under pressure to increase the rate. It could be as early as second half of this year.
Sr. Member
Mar 30, 2017
814 posts
535 upvotes
Image

market's interest rate forecast vs what actually happened for last 15 years.

9/10 times they over-estimate. stick to variable.
5/11/18: profit YTD -3.50%😥
Member
Sep 25, 2009
418 posts
330 upvotes
Without a crystal ball no one knows where rates are going. Rates can go up due to inflation, OR rates can remain low due to economic recovery. People forget that the prime rate isn't just for mortgages, it's for all loans, including small business loans.

IMO, I would go with variable mortgages no matter what. You can lock in a fix anytime and also the prepayment penalties to move the mortgage is 3 month interest (Fixed you will likely get hit with the IRD Penalty).

My best suggestion to you is do not go with QuestTrade Mortgage, their trading platform customer service is bad enough. Stick with Big5 Banks (1.45%) or Tangerine (1.35%) Variable.
Deal Addict
Nov 24, 2013
1583 posts
892 upvotes
Toronto
What happens with interest rate really depends on what happens in the bond markets. The central banks are marketing low inflation with an increased money supply and the bond market will decide whether that's true or not. Right now the market is unsure which direction to take, but based on what I've been reading there seems to be an expectation of inflation.

At the end of the day, only you can decide which path to choose as this decision depends on:
1. Your risk tolerance
2. Your financial situation
3. Your take on the future economic environment (real estate market, inflation, other assets markets).

I'm assuming that since you've qualified for a mortgage, you've passed the stress test which has a substantially higher interest rate.
Newbie
Mar 12, 2017
96 posts
54 upvotes
I'm not sure why I see 2023 for the rate hike in this thread. Everything that I read is suggesting that it has more chance of happening in 2022 than it did a couple of months ago. I took variable 3 months ago thinking that the odds of a hike in 2023 was more probable. I'm not sure that the same is true now. I only have a 200k loan, so I won't lose or win that much money, but if you told me that the increase had more chance of happening in 2022, the variable rate would have been way less enticing.

Even if you can lock in in 1 year, the fixed rate will have already taken the hike into consideration and you won't get 1.99 anymore.

I'm not a specialist and it can go either way, but read about the subject and wonder if it's worth it if the rate starts to rise in 2022. If the odds are 50-50, then maybe it's not worth the risk. If you want flexibility then it could be worth it.
Deal Addict
User avatar
Sep 4, 2005
2930 posts
699 upvotes
Toronto
Variable and get a better rate. If it's owner occupied you can get under 1.25% 5 year var
[OP]
Jr. Member
Sep 19, 2010
111 posts
1 upvote
Thanks for all the feedback.

I understand it's difficult to predict the future but I need to consider some factors before making the decision.

I definitely don't intend to sell in the next 5 years and if the fixed rate increases to 3 or 3.25% for a fixed 5 year term by August 2023, it won't cause any financial stress (based on my current situation).

My question; is will I be financially ahead in the above scenario (1.35% variable for 2 years & 3% for the remaining 3 years) as compared to a flat 1.99% for 5 years (until August 2026)? By approx. how much (i.e. is it worth the risk)?

Is there a calculator or spreadsheet that I can use? I am trying to use the calculator at ratehub - it shows me a generous savings (over 5K) in interest payments and more (over 2K) going towards the principal. I don't think its accurate.
Deal Addict
Jan 15, 2017
4117 posts
3620 upvotes
We don't know your remaining amortization so it is difficult to determine which option is best.

You can use the calculator here: https://itools-ioutils.fcac-acfc.gc.ca/ ... g&lang=eng

Run the scenario for the remaining amortization and mortgage balance and a 2 year term at 1.35%. Note your mortgage balance and interest maid. Then take the mortgage balance at the end of the 2 year term and plug in the numbers for a new amortization (2 years less than your 2 yr term) and a 3% term. Note the mortgage balance and interest paid. Add together the two amounts for total interest paid for the 5 years.

You then start again with your mortgage balance right now, plug in the remaining amortization and a 5 year term for 1.99%. Note the total interest paid and the final mortgage balance. Compare the two to see which one is better.

FYI: this issue is further complicated by the fact that for many variable rate mortgages when the interest rates changes the interest rate on your mortgage will change but your payment will remain the same. So in your case even if your rate increases to 3% you will continue to pay a monthly payment based on 1.35% effectively meaning more of your payment will go to interest and you mortgage balance at the end of your 5 yr term will be higher.

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