Real Estate

Variable vs Fixed Opinion

  • Last Updated:
  • Sep 11th, 2016 9:00 am
[OP]
Member
Mar 18, 2015
218 posts
160 upvotes
Mississauga, ON

Variable vs Fixed Opinion

So I have 2 options for a mortgage
2.39 5y fixed vs Prime minus - 0.45 which works out to be (2.25%)

The difference in payment would be roughly about $50/month

If you're in this scenario, which one would you pick?
I was always in the camp of go variable because a lot smarter guys have done the calculations to give the bank more profit. But that was when the rate differential was always bigger than the paltry 0.14%
8 replies
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Feb 2, 2014
8307 posts
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Toronto
restie wrote: So I have 2 options for a mortgage
2.39 5y fixed vs Prime minus - 0.45 which works out to be (2.25%)

The difference in payment would be roughly about $50/month

If you're in this scenario, which one would you pick?
I was always in the camp of go variable because a lot smarter guys have done the calculations to give the bank more profit. But that was when the rate differential was always bigger than the paltry 0.14%
It really depends on your risk tolerance. But spreads between 5-year fixed and 5-year variable are so thin now, that I actually would go fixed...just my opinion,

Btw, best rates are 2.00% 5-year variable and 2.14% 5-year fixed.
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
Deal Addict
Apr 4, 2013
1274 posts
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Depends on your risk tolerance and how stable is your life. What is the probability that you may have to move before the end of the 5 - yr term? Most fixed rate mortgages have prohibitive pre-payment penalties if you should have to break your mortgage for any reason. This is something you really need to consider when deciding on any fixed rate mortgage. Think ahead for the next 5 years and see whether you could have to move - a new job, a change in family status, parental care. If it helps, reflect back on how your life has changed in the past 5 years and ask yourself if you can expect the same for the next 5 years.
Deal Fanatic
Nov 24, 2013
6147 posts
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Kingston, ON
Variable's great if you foresee having to sell, move, or otherwise break (like a refinance), as the penalty for doing so is much lower. On rates alone however,
CdnRealEstateGuy wrote:
restie wrote: So I have 2 options for a mortgage
2.39 5y fixed vs Prime minus - 0.45 which works out to be (2.25%)

The difference in payment would be roughly about $50/month

If you're in this scenario, which one would you pick?
I was always in the camp of go variable because a lot smarter guys have done the calculations to give the bank more profit. But that was when the rate differential was always bigger than the paltry 0.14%
It really depends on your risk tolerance. But spreads between 5-year fixed and 5-year variable are so thin now, that I actually would go fixed...just my opinion,

Btw, best rates are 2.00% 5-year variable and 2.14% 5-year fixed.
if the spread is only 0.14%, either in your "2 options" or at the best available, that's just not worth it. Fixed is the way to go, unless you have reason to expect to have to break.
Deal Expert
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Apr 21, 2004
54051 posts
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Do bonds in EU and Japan affect our local bonds, which is where fixed rates are derived?

Just read in the news that something really nasty is going on in the bond market where the German bund shot up a full percentage point over one-month period.
Deal Addict
Nov 26, 2005
3100 posts
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for a 0.14 spread under normal circumstances i'd go for fixed definitely,
the only thing worth considering is that right now there is a chance that boc will have a rate cut of 0.25% by december, no chance for a rate hike in 2017. they may start hiking rate in 2018 and after but it really is a gamble for such long term forecast. I assume it is fair to have rate rise up to 2% by 2020. ideally if i could wait, i will lock in after december.
but none the less if you can get 2.0% 5 year fixed it is a good rate already, i 'd go for it.
Deal Fanatic
Nov 24, 2013
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ccyk wrote: for a 0.14 spread under normal circumstances i'd go for fixed definitely,
the only thing worth considering is that right now there is a chance that boc will have a rate cut of 0.25% by december, no chance for a rate hike in 2017. they may start hiking rate in 2018 and after but it really is a gamble for such long term forecast. I assume it is fair to have rate rise up to 2% by 2020. ideally if i could wait, i will lock in after december.
but none the less if you can get 2.0% 5 year fixed it is a good rate already, i 'd go for it.
Just my $0.02, but I think if we were going to see a cut this year, it would have been this decision just past, immediately following the Q2 GDP contraction announcement. With that decision to stand pat, because recovery was strong in June, and Q3 growth is looking good, I don't think we'll see a cut before a hike, barring some other kind of big catastrophe.
Member
Sep 1, 2013
402 posts
95 upvotes
Whether we see a cut or not, mortgage rates are headed lower - as the amount of money flowing into mortgages is multiplying in droves. The best fixed rate 6 months ago was 2.4%+ - so you have had the equivalent of a rate cut already. Sovereign assets are yielding negative and when you see the mortgages backed by the CMHC (= backed by the government) yielding 2%+, it doesn't take long for the reality to sink in.

To the OP, other than purely the interest rate numbers, also consider how much more mortgage you could qualify for under a fixed rate structure (5+ year term). The variable rate mortgages are underwritten with a benchmark yield (4.6% at the moment). If you have other higher costing debt such as credit cards, lines of credit, etc. you could consolidate them using a higher mortgage amount under fixed rates. Of course, if the constraint is the downpayment or the house value - and you already hit that constraint under the variable rate - it wouldn't matter either way.
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Dec 6, 2006
4948 posts
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Toronto
ccyk wrote: for a 0.14 spread under normal circumstances i'd go for fixed definitely,
the only thing worth considering is that right now there is a chance that boc will have a rate cut of 0.25% by december, no chance for a rate hike in 2017. they may start hiking rate in 2018 and after but it really is a gamble for such long term forecast. I assume it is fair to have rate rise up to 2% by 2020. ideally if i could wait, i will lock in after december.
but none the less if you can get 2.0% 5 year fixed it is a good rate already, i 'd go for it.
If BOC rate cut is the reason, then no need to wait.
For variable, your rate will go down accordingly if the banks follow BOC cut.
For fixed, the rate is determined by bonds, not BOC rate.

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