Real Estate

Decision Required - Remain with fixed rate or pay penalty and move to variable rate

  • Last Updated:
  • May 16th, 2021 7:05 pm
[OP]
Jr. Member
Aug 29, 2012
115 posts
5 upvotes
Whitby

Decision Required - Remain with fixed rate or pay penalty and move to variable rate

Here's the situation I'm confronted with:

- Currently have about 3.5 years remaining on a fixed rate at 2.24%
- Have the option to pay a penalty of $5500 to renew this into new 5 year variable rate mortgage currently at 1.40% (Prime minus 1.05%)

I've read that the Bank of Canada is forecasted to hike rates at the end of 2022. Also, I cannot refinance with another lender until the current term expires, unless there is a sale of the property.

Given this scenario and looking at it mostly from a financial perspective, what do you view as the better option and why?
4 replies
Deal Addict
Jan 15, 2017
4332 posts
3915 upvotes
Ottawa
What is the balance of your mortgage?
Deal Addict
Nov 13, 2013
2891 posts
1601 upvotes
Ottawa
rfdlurker4years wrote: About $500K remaining
So you break even in a little over a year if rates don’t move before then. At that point anything above or below 2.24 is your profit. Probably over that 2.5 years you will end up a little ahead. Decent chance (I’d say maybe most likely option the way inflation is looming) you end up a little behind. Small chance you might be paying 5%+ your last year or even two with an increase in payments. If they will cause you great stress or financial hardship maybe better stick with the 2.24.
Deal Addict
Jan 15, 2017
4332 posts
3915 upvotes
Ottawa
The challenge is you need to compare where you would have been with a fixed rate and where you may be with the variable rate.

Right now with a rate of 2.24%, a $500,000 balance and 40 mths left in the term your balance at the end of the term should be about $440,733.

Switching to a variable rate of 1.40% and increasing the balance to $505,000 and 40 months later your mortgage balance should be about $440,245. That's a difference of less than $500. And that's assuming that over the next 3 ½ years the variable rate remains constant and doesn't rise at all.

Personally, I would stick with the fixed rate and leave it as is. That's not a dice I would roll.

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