I was offered 1.89% 5 years fixed by TD for a refinance or 1.85% 5 years variable.Speedwell wrote: ↑ In past Bank of canada had said many a times they have no plans to change rates for X months but they have changed it before said time. It will all depend on economy and inflation. To be honest no model can predict Covid-19 scenarios as this is kind of first in recent human history accurately.
between Fixed Vs Variable heres what i will do.
IF i expect to break my term. No questions go variable.
IF i expect not to break my term. Lock in lower fixed rate there is not much difference between Fixed Vs Variable. Currently Variable is give you advantage of ~ 20 bps. IF you are locked in for 5 years and IF rate goes up lets says after 2 years by 0.5 years and then by the end of your term by another 0.25 year. Calculate how much interest you would have saved and remember you would have paid down more of your principal. This scenario is based on assumption that rates will go up by 0.75% in term of 5 years which i think is realistic at some point we will be back to before covid-19 scenario. So in my calculation i expect till 8/22 i pay ~20bps more vs variable then rate goes up by 0.5 till another 2 years i.e. 8/24 and for last year rate goes up again by 0.25. If i simulate this Fixed rates comes out as winner.
Another possibility if anyone is completely sold on rate is not going to go up until 2023 is that go for 2 years for now then lock in lower rate before it goes back up in 2023. This is high risk but better reward as you may get lower rate for longer. Having said that i am not sold on that rates won't go up until 2023. I think come 2022 we will see rates going up.
Personally i am going with fixed approach. As i expect variables rates to be up by atleast 0.75 (before Covid-19 levels) in next 5 years.
A difference of 0.04% is a no brainer to go for 5 years fixed for me.
Assuming it is true that no rate increases until fall of 2023.
I would assume a +0.25% increase in the fall of 2023 and another +0.25% in 2024.
This math is not exact as it does not take into consideration capital payment differences but a quick napkin math :
Overpaying from fall 2020 to fall 2023 = 3x0.04% = 0.12%
Savings from rate increases from fall 2023 to fall 2025 = 1x(0.25%-0.04%) + 1x(0.5%-0.04%) = 0.67%
Net savings = 0.67% - 0.12% = 0.55%
I would need variable to be at least 0.25% lower than fixed rate for me to consider variable 5 years right now (so 1.64% in the above example).
In this case, with the above scenario the net savings would still be -3x0.25%+0+0.25%=-0.5%, so effectively overpaying by 0.5% over 5 years, or to put it in another way : potential savings if I go with a variable that is 0.25% lower than the five years fixed of 1.89%
Given that the scenario mentioned above is in my opinion the most conservative scenario (I can't imagine anything less than 2 rate increases over the next 5 years), 0.25% discount over the five years fixed rate is where it starts to be interesting to go with variable.