Yet another Fix v/s variable interest thread July 2021

Last Updated:
Oct 13th, 2022 4:42 pm

Tags:

SCORE

Reply to ThreadReply

Search this thread

Search this thread

Jul 16th, 2021 10:00 am

Asker123 [OP]: Deal Addict; Jan 7, 2014; 2679 posts; 535 upvotes; Manitoba

Jul 16th, 2021 10:00 am

Yet another Fix v/s variable interest thread July 2021

Hi there,
I read a bit on this topic. A good article is below
https://financialpost.com/moneywise/why ... -than-ever

if the difference in 5 year variable v/s 5 year fixed offered right now in July 2021 is 0.9% , what is rfd's take , go Variable with option of moving to fixed by paying 3 months interest?

It was interesting to know that both variable and fixed interest rates are related to different parameters - variable to BOC rates and Fixed to Bond Yields etc

— — — — — — — — — — — —
It will never be Oil or Gas or Wind or Solar or Electric. It will be Oil and Gas and Wind and Solar and Electric.

33 replies

Jul 16th, 2021 11:05 am

leolozon: Sr. Member; Mar 12, 2017; 831 posts; 797 upvotes

Jul 16th, 2021 11:05 am

Old article. The chances of the rate going up in 2022 is way higher right now.

If you take variable, maybe breaking to go to fix in a year won't be a good idea. Let's say the fixed rate still keep going up in 2022 (likely) and is 1.25 over your variable next year. Is it really better to break or keep the variable and hope that the hike is slow? Plus there's a chance that they raise the rates in 2022 only to have to get them back down a year or two later and then you're stuck with your fixed.

Just do two scenarios with a hike coming at the end of 2022, one with a slow hike and one with a faster hike and see how you feel about the numbers VS taking fixed right now. I doubt they go over 2% in the next 4 years from what I've read.

I took variable 4 months ago with a .5 difference and I still don't regret it. I went with fixed 1.5 years ago and highly regret it as I ended up breaking my fixed (broker told me not to take variable as they were too close).

Variable will beat fixed most of the time, so if you're ready to gamble, it's a smart gamble on average.

Last edited by leolozon on Jul 16th, 2021 11:26 am, edited 4 times in total.

+4

Jul 16th, 2021 11:15 am

bomber17: Deal Fanatic; Apr 5, 2016; 6077 posts; 4565 upvotes; Calgary/Vancouver

Jul 16th, 2021 11:15 am

Yep. Variable all the way. Canada's economy is so rate sensitive, everytime they try to raise the rates, they have to lower it back again.

Plus, a lot of ppl are not keeping their mortgage full term. Some want to upsize/downsize, or refinance for various reasons.

Don't want to be like the ppl who locked in fixed in 2018.

+1

Jul 16th, 2021 11:38 am

jaysdt: Newbie; Sep 6, 2018; 93 posts; 61 upvotes

Jul 16th, 2021 11:38 am

let's say you can get 1% variable and 1.7% fixed on a 5-year term, so if you have the view that the BoC will not raise rates more than 3 times (assuming 25 bps each) in the next 5 years, then stick with variable. you should really plug in your own numbers and do some calculations to figure out what's best for you. blindly picking variable because it has done better in a decreasing rate environment probably isn't the best decision, but again, it depends on your views of where rates will go.

Jul 16th, 2021 11:46 am

geokilla: Deal Expert; Mar 1, 2008; 18189 posts; 7986 upvotes; Toronto, Ontario

Jul 16th, 2021 11:46 am

jaysdt wrote: ↑ let's say you can get 1% variable and 1.7% fixed on a 5-year term, so if you have the view that the BoC will not raise rates more than 3 times (assuming 25 bps each) in the next 5 years, then stick with variable. you should really plug in your own numbers and do some calculations to figure out what's best for you. blindly picking variable because it has done better in a decreasing rate environment probably isn't the best decision, but again, it depends on your views of where rates will go.

Wouldn't it have to raise more than 3 times? With the lower variable rate, more of your payment goes to principal compared to interest. I believe we'll get rate increases within the next 5 years but when that 4th rate hike comes will be key. Even if the variable rate goes to 1.7% in 2024, from now till 2024, I'll have paid significantly more in principal. Don't know how to perform the calculation but I think the rate would have to rise above 2% by a certain year in order for the variable rate to not be worth it within the next 5 years.

RFD is love. RFD is life.

2023 Advan Tire Winter Sale

+2

Jul 16th, 2021 11:56 am

Asker123 [OP]: Deal Addict; Jan 7, 2014; 2679 posts; 535 upvotes; Manitoba

Jul 16th, 2021 11:56 am

What about Hybrid - Is this even a product as such or just that you take variable and when you want to Switch to fixed, break the variable ( 3 months interest as penalty) and go for fixed

RBC recommends RBC Homeline plan and is advertising it as
"The RBC Homeline Plan allows you to split your mortgage and enjoy the advantages of both variable and fixed rates. The variable portion lets you take advantage of potential long-term savings,while the fixed rate portion protects you if rates rise."

https://www.rbcroyalbank.com/mortgages/ ... -plan.html

I am confused whether it is same as Hybrid that I mentioned in the beginning.
If someone does not need a line of credit ( have reserved funds already for emergencies) , does this RBC Homeline plan makes any sense?

Anyone who has taken RBC Mortgage ( or others who are knowledgeable ) can suggest how this Homeline is working for you? How is this a combination of variable and fixed?

— — — — — — — — — — — —
It will never be Oil or Gas or Wind or Solar or Electric. It will be Oil and Gas and Wind and Solar and Electric.

Jul 17th, 2021 1:02 am

kangarooz: Deal Addict; Apr 12, 2013; 2924 posts; 1908 upvotes; Moon

Jul 17th, 2021 1:02 am

geokilla wrote: ↑ Wouldn't it have to raise more than 3 times? With the lower variable rate, more of your payment goes to principal compared to interest. I believe we'll get rate increases within the next 5 years but when that 4th rate hike comes will be key. Even if the variable rate goes to 1.7% in 2024, from now till 2024, I'll have paid significantly more in principal. Don't know how to perform the calculation but I think the rate would have to rise above 2% by a certain year in order for the variable rate to not be worth it within the next 5 years.

100% with this comment. Also factor in if you want to pull money out/refi/sell it generally is much cheaper on variable.

Last edited by kangarooz on Aug 11th, 2021 9:44 pm, edited 1 time in total.

Koodo, Public Mobile, Lucky Mobile Customer

+1

Jul 17th, 2021 3:08 am

mastaj: Deal Addict; Dec 13, 2010; 1000 posts; 1648 upvotes; Vancouver

Jul 17th, 2021 3:08 am

I view it as gambling no matter which way you choose, variable or fixed. But to me, there are 3 positive outcomes with variable, and only 1 with fixed:

With Variable, you "win" if:

rates stay the same (since you start with a lower rate than fixed)
rates decrease
rates increase slowly, or only later in your term (since you saved on interest early in the term)

With Fixed, you "win" if:

rates increase early in your term, above what you locked into

The added plus for me, is the lower break penalty with variable - so personally, I prefer variable mortgages, as the odds are better that I will come out ahead (I know that the chances of each outcome above happening are not equal of course).

Having said that, fixed rates give you that peace of mind, which is very much an individual preference, and not something we can put a dollar figure on!

+2

Jul 19th, 2021 8:51 pm

CanadianConsumerYEG: Deal Addict; Aug 30, 2020; 3048 posts; 5830 upvotes; YEG/YYZ

Jul 19th, 2021 8:51 pm

Variable. Lol at paying a higher interest rate because you're afraid the rate will go higher. Average Canadian has less than $200 in their bank account and lives paycheque to paycheque, no way rates will go up that significantly.

+2

Jul 20th, 2021 3:59 pm

jmc111: Deal Addict; Mar 10, 2014; 4118 posts; 4647 upvotes

Jul 20th, 2021 3:59 pm

Go with variable all the way. Even if the rates go up, the variable rate will need to move up 1.00 basis points just to reach around 3%. Chances of BofC increasing 4 times starting late next year is very slim. They may move .25 or .50 basis points but they know if they rock the boat too fast, it will create a ripple effect with those borrowers who are already over extended. Ironic thing is that BofC caused this mess in the first place last year when the dropped the overnight lending rate to .25%. They should have never done this. The home prices would not have gone out of whack as it is now. Good luck to all those young kids trying to pay for a $1.0M+ home with an average salary without the help of the bank of mom and dad.

Also breaking a variable rate mortgage is only a 3 month interest penalty, compared to a fixed rate which is the interest rate differential (IRD). Banks want fixed so they know they can screw you when you need to break the mortgage.

Jul 20th, 2021 4:15 pm

seatiger: Deal Addict; Mar 30, 2017; 1218 posts; 977 upvotes; GVA

Jul 20th, 2021 4:15 pm

nope, econ sucks, yield is coming down, go variable.

Jul 21st, 2021 6:10 am

fogetmylogin: Deal Addict; Nov 13, 2013; 4222 posts; 3379 upvotes; Ottawa

Jul 21st, 2021 6:10 am

mastaj wrote: ↑ I view it as gambling no matter which way you choose, variable or fixed. But to me, there are 3 positive outcomes with variable, and only 1 with fixed:

With Variable, you "win" if:

rates stay the same (since you start with a lower rate than fixed)

rates decrease

rates increase slowly, or only later in your term (since you saved on interest early in the term)

With Fixed, you "win" if:

rates increase early in your term, above what you locked into

The added plus for me, is the lower break penalty with variable - so personally, I prefer variable mortgages, as the odds are better that I will come out ahead (I know that the chances of each outcome above happening are not equal of course).

Having said that, fixed rates give you that peace of mind, which is very much an individual preference, and not something we can put a dollar figure on!

Yeah but the chances of each of those are wildly different. Rates stay the same-near zero. Rates decrease -near zero but maybe 5%. Rates increase slowly or below the rate where you break even. This is of course hard to predict but probably below 50%.

All that said I am going with variable for my next purchase but largely because I expect to pay down aggressively if rates rise as I am leaving a lot of funds in cash. If rates stay low I will keep the cash in a mix of safe investments and stocks.

The one myth is thinking you can lock in if rates rise. This is often not possible or advantageous. You can't go back in time and lock in with the fixed rate available now. The best variable rates don't let you switch at all and even the more flexible ones charge 3 months interest. So in a year after 4 hikes you can switch to what will probably be something like a 3% fixed but that is still 1% higher than your variable at that point so essentially the same gamble you are making now.

Jul 21st, 2021 3:14 pm

skipper1979: Member; Jan 9, 2012; 314 posts; 336 upvotes

Jul 21st, 2021 3:14 pm

CanadianConsumerYEG wrote: ↑ Variable. Lol at paying a higher interest rate because you're afraid the rate will go higher. Average Canadian has less than $200 in their bank account and lives paycheque to paycheque, no way rates will go up that significantly.

Main risk to Canadian economy is not rates but recency bias of borrowers. Just because it has not happened in recent past doesnt mean it wont happen. Infact there is more chances of it happening.
wages all have gone up. This is permanent change.
If there is stagflation, BoC will be forced to raise rates faster.
Best time to buy insurance is when you dont need it.
You dont buy home insurance hoping your house will burn down.

+1

Aug 2nd, 2021 2:49 pm

Asker123 [OP]: Deal Addict; Jan 7, 2014; 2679 posts; 535 upvotes; Manitoba

Aug 2nd, 2021 2:49 pm

Hello folks, I am going for 5 year variable.

Question - I heard that in variable mortgage, there are products that let your monthly payment as fixed even if interest rate changes. This way, if interest rate rises, more part of your payment will go towards interest and less towards principle. If rate reduces, more goes towards principle less towards interest.
should I talk about his fixed monthly payment with the mortgage specialist ?
The approval letter that I have received for my variable mortgage says my payment frequency is monthly and it mentions a Total payment. Does it means that I have got this fixed monthly payment product for my mortgage?

Anyone has similar situation. I thought, when interest rate changes, your payment changes when the rate changes

My Interest rate section says - "Our prime rate - 1.1500000% per year, calculated not in advance, at the same frequency as your payments. The interest rate is based on our prime rate, which is 2.4500000% per year as of the date of this letter."

Any thoughts?

— — — — — — — — — — — —
It will never be Oil or Gas or Wind or Solar or Electric. It will be Oil and Gas and Wind and Solar and Electric.

Aug 3rd, 2021 2:25 pm

Asker123 [OP]: Deal Addict; Jan 7, 2014; 2679 posts; 535 upvotes; Manitoba

Aug 3rd, 2021 2:25 pm

^ Anyone please.....

— — — — — — — — — — — —
It will never be Oil or Gas or Wind or Solar or Electric. It will be Oil and Gas and Wind and Solar and Electric.

Aug 3rd, 2021 3:35 pm

kangarooz: Deal Addict; Apr 12, 2013; 2924 posts; 1908 upvotes; Moon

Aug 3rd, 2021 3:35 pm

Almost all the variable mortgages are setup with buffer room, and your payment stays the same unless the interest rates go up by X%. Just take some time to read the documents you are provided all of the details are there.

The big banks in Canada do not offer interest only mortgages, at least not for normal customers like us if thats what you are asking.

Koodo, Public Mobile, Lucky Mobile Customer

Aug 9th, 2021 4:16 pm

maebach: Deal Addict; Jul 18, 2005; 4967 posts; 153 upvotes; Toronto

Aug 9th, 2021 4:16 pm

My $0.02 after thinking about this all weekend. Caveat: Im not a macroeconomist. My mortgage rate quoted was 0.98 variable and 1.74 fixed, that's about 3 rate hikes

Looking back at the BoC monetary policy over the past 10 years, they decreased rates to 0.75 in July 2015 (I think because of oil collapse). It remained at 0.75 until July 2017 when it increased to 1.00. That means it stayed low for 2 years. From August 2017 to October 2018 (~1 year), they increased rates 4x to 2.00. It remained at 2.00 until COVID when it fell to 0.50 in April 2020. It seems like 2.00 is the target number

Based on job adds, lower than expected inflation and vaccine rollout, my expectation is we get a rate hike in H2 2022. That would mean rates will have stayed low for about 2 years (April 2020 - June 2022). That would also coincide with the last rate hike where rates were low for 2 years from July2015 - July 2017. I think, like last time, the BoC will increase rates as fast as possible back to 2.00, especially after all the blowback and negative press about hot housing market and low interest rates.

Based on my model, a variable rate would only be better if the 1st rate hike is in 2023 or later. And if it continues to increase from there Im ahead by about $3k-$5k over the term of my mortgage. Now, if my expectations are correct and a rate hike homes in 2022, Im either ahead by $2-3k or behind $3-5k depending on the speed of the rate hikes. As of now, personally, it's not worth the headache for me to be go variable.

Very interested to read the opinions of others on their forecast

Heatware PEPSI IPOD MINI WINNER (JUNE 2005)

+1

Aug 10th, 2021 1:21 pm

kangarooz: Deal Addict; Apr 12, 2013; 2924 posts; 1908 upvotes; Moon

Aug 10th, 2021 1:21 pm

maebach wrote: ↑ My $0.02 after thinking about this all weekend. Caveat: Im not a macroeconomist. My mortgage rate quoted was 0.98 variable and 1.74 fixed, that's about 3 rate hikes

Looking back at the BoC monetary policy over the past 10 years, they decreased rates to 0.75 in July 2015 (I think because of oil collapse). It remained at 0.75 until July 2017 when it increased to 1.00. That means it stayed low for 2 years. From August 2017 to October 2018 (~1 year), they increased rates 4x to 2.00. It remained at 2.00 until COVID when it fell to 0.50 in April 2020. It seems like 2.00 is the target number

Based on job adds, lower than expected inflation and vaccine rollout, my expectation is we get a rate hike in H2 2022. That would mean rates will have stayed low for about 2 years (April 2020 - June 2022). That would also coincide with the last rate hike where rates were low for 2 years from July2015 - July 2017. I think, like last time, the BoC will increase rates as fast as possible back to 2.00, especially after all the blowback and negative press about hot housing market and low interest rates.

Based on my model, a variable rate would only be better if the 1st rate hike is in 2023 or later. And if it continues to increase from there Im ahead by about $3k-$5k over the term of my mortgage. Now, if my expectations are correct and a rate hike homes in 2022, Im either ahead by $2-3k or behind $3-5k depending on the speed of the rate hikes. As of now, personally, it's not worth the headache for me to be go variable.

Very interested to read the opinions of others on their forecast

Interesting, what are the timeline you use for your hikes? I am guessing your model calculates the savings before the 3rd hike? I think fixed is good if you are the type to lose sleep after every hike, honestly when the rates are 2%> we are splitting hairs.

Personally I love the flexibility of variable but if you are 100% sure if you are sure you will not be moving or looking to refi in the 5 years I can see why someone would like to lock in now.

Koodo, Public Mobile, Lucky Mobile Customer

Aug 10th, 2021 10:32 pm

Furcorn: Deal Addict; Jun 7, 2017; 1043 posts; 835 upvotes; BC

Aug 10th, 2021 10:32 pm

Always variable. Always.

+1

Aug 11th, 2021 12:09 am

mstefa: Member; Apr 15, 2009; 314 posts; 322 upvotes; toronto

Aug 11th, 2021 12:09 am

At times when all the world developed countries are trying to devalue their currency, no country will raise rates significantly. It would take US to reach full employment and a very hot economy before they raise and everyone follows. Not likely to happen very fast.

+2

Reply to Thread

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)