Canadian Money Forum banner
41 - 60 of 60 Posts

·
Registered
Joined
·
3,781 Posts
You have to consider that a fixed rate carries a large penalty should you need to break your term.

Also, you cannot compare your mortgage rate with a different period in time. When your friend locked in 2.09%, you should be comparing it to the variable rate at that time. Also, you cannot just focus on 1 rate for 1 term only. Typically, a mortgage cycle will contain 5 renewals. Therefore, its the average of all rates that you should be considering. Choosing the lowest rate at each renewal guarantees you that you will end up with the lowest average.
Very true. I was bringing up an example where it's not just about the cheapest interest rate, but rather there are some case where fixed is better using metrics that aren't just financial. In the case of my friend, they were so close to the edge last renewal, any increase in expenses could have toppled them. I even questioned if they should be owning a home (probably not at the time), but when we looked at the options of selling and moving and the overall picture, staying was the best idea. If they were trying to buy based on their financial status, I would have told them no way. I would go as far as saying someone who can't afford the variability of a variable mortgage shouldn't buy a house, but that's a different discussion.

My point for some people, if they cannot afford much of a fluctuation, then a fixed mortgage may may be an appropriate choice at the time. So variable is not always the better especially for someone on a really tight budget and renewing.
 

·
Registered
Joined
·
24,069 Posts
2%-5% is about a 30% increase in mortgage payment, I think at that point we'll have risk of destabilizing the market.
So what?

The housing market was already destabilized by low interest rates and a "crash" in mortgage payments. Or do you call a 25% single year price increase normal?

As a nation, if we tolerated mortgage payments halving, we also should tolerate mortgage payments doubling. It's not exactly capitalism to say that loans must always get cheaper... in fact that's a pretty twisted way to approach financial markets and debt markets.

Sometimes loans get more expensive. We aren't children who always need Daddy to make mortgages cheaper and sweeter for us.
 

·
Registered
Joined
·
11,213 Posts
2%-5% is about a 30% increase in mortgage payment, I think at that point we'll have risk of destabilizing the market.
I'm all for a plateau or even decrease in housing values, but a crash isn't good.
So what?

The housing market was already destabilized by low interest rates and a "crash" in mortgage payments. Or do you call a 25% single year price increase normal?
So what?
I think there is a concern that a 30% increase in the mortgage payment is problematic for some people.

25% price increase clearly isn't normal, but in my area it makes sense, we basically have large numbers of people leaving Toronto and buying up housing here at a fraction of the price.
Other areas also had significant price jumps, much of it is simply justified by the lack of supply and low interest rates.

Completely reasonable, not normal, but being "normal" is irrelevant. My concern is if it is problematic.
 

·
Registered
Joined
·
11,213 Posts
FYI, my mortgage payment is up about 15%, easy to handle for me, (I budgeted on this), but for many this is troublesome.

Also I still think variable is best, if you can afford the risk.
 

·
Registered
Joined
·
730 Posts
Has anybody recorded the mortgage rates monthly since the beginning of this year?

The variable vs fixed debate was all hypothetical for the 20 to 30 years or so before this year. Now's the time to actually record the data and see what's actually happening.
 

·
Registered
Joined
·
4,165 Posts
Has anybody recorded the mortgage rates monthly since the beginning of this year?

The variable vs fixed debate was all hypothetical for the 20 to 30 years or so before this year. Now's the time to actually record the data and see what's actually happening.
 

·
Registered
Joined
·
2,726 Posts
Has anybody recorded the mortgage rates monthly since the beginning of this year?

The variable vs fixed debate was all hypothetical for the 20 to 30 years or so before this year. Now's the time to actually record the data and see what's actually happening.
https://altrua.ca/variable-vs-fixed-mortgage/

Variable is Historically and Statistically Shown to Cost Less than Fixed

According to a 2001 report completed by Moshe Milevsky, Professor of Finance at York University Schulich School of Business, variable mortgage rates beat 5 year fixed rates 70% – 90% of the time.

Using data from 1950 – 2000 the study includes a period of high market volatility in the 1980s and 1990s when mortgage rates were much higher than they are at present. This means that the data used in this study is not selected during a period that would manipulate the results to favour a variable rate over a fixed rate.

In fact, I believe it’s quite the opposite. I believe that the rate volatility in the 1980s and 1990s skews the argument more towards fixed rate and that it is more likely for rates to remain lower than these levels even in current periods of high inflation.

With this said, in the author’s words “When interest rates are at low levels, one is better off locking in at long term rates”.

In other words, the author of the study suggests that variable rates are the better choice, but locking into a fixed-rate mortgage at the right time is ultimately the goal. We will address the variable rate lock in feature, later in this article.

On a side note, some will point to the period of higher interest rates during the 1980s and 1990s as a reason to avoid a variable rate. However, as we will review below, we live in a very different, debt-laden economy now whereby the effects of a 1% higher Central Bank rate can have over 5 times the economic impact as a 1% higher rate did in the 1980s. Indeed, adjusted to inflation, private and public debt levels are currently 5+ times higher than in the 1980s.

Therefore, I contend that unless we see substantial economic productivity and GDP growth, we are not likely to see the kind of high 7%+ rates that were seen in the 1980s and 1990s.
On a side note, "locking into a fixed-rate mortgage at the right time is ultimately the goal" is also what I would call... market timing. Even more with rates that went down over the past 40 years.
 

·
Registered
Joined
·
730 Posts
I just googled "variable open rate mortgages" and found a result that says " 5 year variable open". Not sure what that means. If it's open, that means you can cancel at anytime without penalty. So why does 5-year come into play?
 

·
Registered
Joined
·
688 Posts
On a side note, "locking into a fixed-rate mortgage at the right time is ultimately the goal" is also what I would call... market timing.
And this seems out of phase to me as an attempt to market time. Most of the time the yield curve is upward sloping. So the short / variable rate < 5 year fixed on average over a multi-decade borrowing period. Therefore isn't it too late to lock in? Wouldn't one want to lock in the long rate before rates move up? And in so doing avoid the higher short term rate while the curve flattens and inverts?

(I'm incredibly busy at the moment and post this as food for thought only but some one should look at the data and model if it is important to their financial position.)
 

·
Registered
Joined
·
730 Posts
At the beginning of Feb 2022, 5yr fixed was about 1.5% higher than variable.
Since then variable had risen about 1.5% but is still less than the 5yr rate of Feb. So in 4.5 months, the person who signed onto the variable is still ahead. But there's still more upside as long as Russia is still attacking Ukraine. When variable passes the Feb 5yr fixed, no one knows how long it'll stay there.

Who knows what will result at the end of 5 years. Will the war in Ukraine still be going on? If Russia suddenly pulls out this year, gas supply and sanctions will loosen and rates go down again.
 

·
Registered
Joined
·
3,702 Posts
I took a mortgage on my home in November to use as a down payment on a home for our son ,the rate was 1.3% and 30 years .Today it is 2.55% and my son has not bought a house but if i kept the payments the same it is now 37 year amortization. We have not spent the money it is just sitting in a HISA in his name but prices have dropped 20% since he started looking. It is not a huge payment or huge mortgage by most standards but I wonder how these with $500,000+ are handing their amortization realities as mortgage rates go up.
 

·
Registered
Joined
·
2,998 Posts
I just googled "variable open rate mortgages" and found a result that says " 5 year variable open". Not sure what that means. If it's open, that means you can cancel at anytime without penalty. So why does 5-year come into play?
The variance on prime rate is fixed for 5 years. ex. You‘re guaranteed prime - x% for 5 years. Although I’ve rarely seen any discount offered on prime for open mortgage.

also, some lenders will keep your payments fixed on this type of variable rate mortgage, unless prime goes beyond the pre-calculated trigger point.
 

·
Registered
Joined
·
730 Posts
Unless I'm mistaken, I recall back in 2005 to 2007 when I still owned a rental house, my variable rate mortgage payments remained the same. When the interest fluctuated on a month-to-month basis, it was only the proportion that went to principle/ interest that changed while the monthly mortgage payment stayed the same.

Today, when someone speaks of variable rate, it's as if the entire monthly mortgage payment fluctuates along with the interest.

If the 2005-2007 example were still available, that would really help homeowners with their cash flow.
 

·
Registered
Joined
·
1,814 Posts
Variable rates continue to be favorable. The spread is still significant. Variable rate will always outperform the fixed when looking at the life of a mortgage.

Qualifying for a fixed rate is becoming more difficult due to the stress test. Some are defaulting to variable for that reason alone. I suspect this will change once the benchmark rate increases to compensate for the rising rates.

I just googled "variable open rate mortgages" and found a result that says " 5 year variable open". Not sure what that means. If it's open, that means you can cancel at anytime without penalty. So why does 5-year come into play?
The difference between a variable open and closed term is that you can payoff an open term anytime without penalty. A closed term will trigger 3 month interest penalty. The "5 year" pertains to the discount obtained at the time of signing the mortgage. So in a scenario of Prime minus 1.00%, the Prime rate will vary whereas the 1.00% discount is guaranteed for a 5 year term. An open term will carry a much smaller discount or maybe even a premium added to Prime.
 

·
Registered
Joined
·
688 Posts
Variable rates continue to be favorable. The spread is still significant. Variable rate will always outperform the fixed when looking at the life of a mortgage.
Thanks mortgage. I assumed this was the case from my fixed income experience (as commented up thread).

Is there any rule of thumb, or better yet historical data on street pricing for variable and fixed? I'd like to build a link to a model I have that forecasts bond prices.
 

·
Registered
Joined
·
1,814 Posts
Thanks mortgage. I assumed this was the case from my fixed income experience (as commented up thread).

Is there any rule of thumb, or better yet historical data on street pricing for variable and fixed? I'd like to build a link to a model I have that forecasts bond prices.
The problem is all these statistics are derived from Bank "posted" rates, which are astronomically high and not one customer obtains those rates. These statistics simply show the rate "trend" which is a good enough indicator to demonstrate the spreads between fixed and variable.....but not good enough to benchmark against bond prices.
 

·
Registered
Joined
·
24,069 Posts
I took a mortgage on my home in November to use as a down payment on a home for our son ,the rate was 1.3% and 30 years
Many people don't seem to realize that this is quite common. Borrow against one property, use it as a down-payment on another property.

I was astounded when I first learned that people did this. Really shows you how real estate prices (buying pressure) is fuelled by the easily availability of credit.
 

·
Registered
Joined
·
3,702 Posts
Many people don't seem to realize that this is quite common. Borrow against one property, use it as a down-payment on another property.

I was astounded when I first learned that people did this. Really shows you how real estate prices (buying pressure) is fuelled by the easily availability of credit.
James I owed $124,000 on a property worth $1,300,000 and have seven figures in the bank .YES We took the money gifted to our son and he has not bought yet ,it will make it much easier having him holding that cash when he does find a place to buy. I figure by not buying he has saved over $120,000 since we gave him the money. It is not the first time I took money from one to buy another and probably won't be the last. The mortgage payment i have is around 3 days salary :)
 

·
Registered
Joined
·
24,069 Posts
James I owed $124,000 on a property worth $1,300,000 and have seven figures in the bank .YES We took the money gifted to our son and he has not bought yet
I know we're getting a bit off topic here but I'm very curious. With seven figures in a bank account, why take out a new mortgage and not just use your existing cash? Seems like unnecessary use of debt to me but maybe I'm missing something.

Or maybe I'm misinterpreting what you mean by "have seven figures in the bank".

I think it's great that your son has the cash ready to go, and is waiting. I'm just trying to figure out the mechanics of this mortgage activity.
 
41 - 60 of 60 Posts
Top