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
Deal Addict
Mar 30, 2017
1162 posts
911 upvotes
lessca wrote: 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.
I dont get why you want to switch to 3% after 2 years, I would just ride out the gradual rate hike(if it materialize), but here are the calculations:

A:
Interval: Monthly
Nominal Annual Rate: 1.990%
CASH FLOW DATA
Event Date Amount Number Period End Date
1 Loan 1/01/21 283,000.00 1
2 Payment 1/01/21 1,195.03 60 Monthly 12/01/25
3 Payment 1/01/26 237,019.72 1

Total payment 71701.8
Ending balance 237,019.72
total interest 25,721.52

AMORTIZATION SCHEDULE - Canadian, Odd Days Straight-line, Semiannual

B:
Interval: Monthly
Nominal Annual Rate: 1.350%
CASH FLOW DATA
Event Date Amount Number Period End Date
1 Loan 1/01/21 283,000.00 1
2 Payment 1/01/21 1,110.24 24 Monthly 12/01/22
3 Rate Change 1/01/23 Rate: 3.000 % Interval: Monthly
4 Payment 1/01/23 1,318.01 36 Monthly 12/01/25
5 Payment 1/01/26 238,642.86 1

Total payment 74094.12
Ending balance 238,642.86
total interest 29,736.98

AMORTIZATION SCHEDULE - Canadian, Odd Days Straight-line, Semiannual
profit on 6/23/2021 = 117.61% since 11/10/2020 to be exact😎
Deal Addict
Mar 30, 2017
1162 posts
911 upvotes
Here is my guess, rate hike 0.25% every half year from year 3, still beat 1.99% fixed

Interval: Monthly
Nominal Annual Rate: 1.350%
CASH FLOW DATA
Event Date Amount Number Period End Date
1 Loan 1/01/21 283,000.00 1
2 Payment 1/01/21 1,110.24 24 Monthly 12/01/22
3 Rate Change 1/01/23 Rate: 1.600 % Interval: Monthly
4 Payment 1/01/23 1,140.43 6 Monthly 6/01/23
5 Rate Change 7/01/23 Rate: 1.850 % Interval: Monthly
6 Payment 7/01/23 1,170.46 6 Monthly 12/01/23
7 Rate Change 1/01/24 Rate: 2.100 % Interval: Monthly
8 Payment 1/01/24 1,200.30 6 Monthly 6/01/24
9 Rate Change 7/01/24 Rate: 2.350 % Interval: Monthly
10 Payment 7/01/24 1,229.92 6 Monthly 12/01/24
11 Rate Change 1/01/25 Rate: 2.600 % Interval: Monthly
12 Payment 1/01/25 1,259.29 6 Monthly 6/01/25
13 Rate Change 7/01/25 Rate: 2.850 % Interval: Monthly
14 Payment 7/01/25 1,288.40 6 Monthly 12/01/25
15 Payment 1/01/26 236,404.42 1

Total payment 70378.56
Ending balance 236,404.42
total interest 23,782.98
profit on 6/23/2021 = 117.61% since 11/10/2020 to be exact😎
Deal Addict
User avatar
Nov 30, 2005
1839 posts
1420 upvotes
Ottawa, ON
I'm very concerned about interest rates myself. Real inflation is a lot higher than 3.5% as per the CPI; no one truly believes the CPI is a real indicator of inflation anymore because the way they've cooked the books for so long. I just filled my gas for $1.60 for prem, prices for commodities are through the roof, home prices have sky rocketed and food prices are at least 25% higher for everything due to the chain reaction. Interest rates hikes will be coming sooner and more frequent than the BoC predicts else they risk a complete runaway hyper inflation. However, the problem is If they raise price though and with lagging GDP, they cannot service their debt. What a crap hole we find ourselves in.
Deal Addict
Mar 30, 2017
1162 posts
911 upvotes
ZxExN wrote: I'm very concerned about interest rates myself. Real inflation is a lot higher than 3.5% as per the CPI; no one truly believes the CPI is a real indicator of inflation anymore because the way they've cooked the books for so long. I just filled my gas for $1.60 for prem, prices for commodities are through the roof, home prices have sky rocketed and food prices are at least 25% higher for everything due to the chain reaction. Interest rates hikes will be coming sooner and more frequent than the BoC predicts else they risk a complete runaway hyper inflation. However, the problem is If they raise price though and with lagging GDP, they cannot service their debt. What a crap hole we find ourselves in.
well, lumber is -30% this month and who know what happen to rentFace With Tears Of Joy
and you know CPI is all that matter to BoC. as long as CPI is low, they act accordingly and give them roomy excuse to keep rate low. 'real' inflation is just a 'myth' to BoC.
profit on 6/23/2021 = 117.61% since 11/10/2020 to be exact😎
Deal Addict
Nov 13, 2013
3505 posts
2120 upvotes
Ottawa
light2 wrote: 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.
No offense but I think all of this post is bad advice. We can predict to some extent what will happen and even if we can't that doesn't mean OP should tie himself to the whims of the market. Actually the consensus prediction that rates will stay low is best reason to go with variable. (along with the lower breakage fee). Nobody forgets interest rates are important to the whole economy. This is the reason rates are raised to lower inflation. They cool the whole business cycle.

While technically you can lock in at anytime in practice the risk remains. So last half of this year two .25 increases and fixed rates are now 3%. Lock in at 3% with penalty or stick with 2.% variable? You will argue wait. 6 months later another .5 increase and fixed are 3.5% Lock in then with a huge loss versus a fixed now or think rates might go down later and stick with 2.5% variable? By the time the inflation killing hammer comes down it's too late and the fixed rates will be higher than variable at that point as the expectation is more increases are coming.

Lastly go with the lowest rate not the best platform. Yes for trading this matters but for mortgage customer service almost irrelevant. Maybe as a tie breaker but generally you get automatic withdrawal and call or go online for a statement, prepayment or to terminate.

Again consensus is rates will stay low to make the variable probably a slight net better decision. There is a minority view that rates could go much higher if inflation expectations become a self fulfilling prophecy. This article covers consensus and the chicken little view from a major bank but perhaps unsurprisingly a German one.

https://www.cnbc.com/2021/06/07/deutsch ... ation.html
Deal Addict
Feb 25, 2015
1029 posts
1253 upvotes
NB
fogetmylogin wrote: …So last half of this year two .25 increases and fixed rates are now 3%. Lock in at 3% with penalty or stick with 2.% variable? You will argue wait. 6 months later another .5 increase and fixed are 3.5% Lock in then with a huge loss versus a fixed now or think rates might go down later and stick with 2.5% variable? By the time the inflation killing hammer comes down it's too late and the fixed rates will be higher than variable at that point as the expectation is more increases are coming.
one might as well lock for ten years at 2.14-2.59%, betting there will be more than four .25 rate hikes in the next two years or so

even if the variable caps at 2.5, total interest over the life of the loan will be comparable (minor loss vs 2.59 fixed)

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