Mortgage rates

[Paul Meredith]

Reviving an old thread --

My mortgage is up for renewal in August; it's been prime minus 0.625 for six years at BMO. The current offer that BMO has for me is 5-yr variable prime minus 0.5 (prime is currently 3.0), or 5-year fixed at 2.99% They say it's the best deal they will offer. Forumers -- which do you think is a better deal thinking about interest rates over the next few years? Pre-payment privileges are similar I think, and neither option is an open mortgage. I have significant equity, and the mortgage isn't that large, so I'm not concerned about affording payments should prime go up. I'm also wondering if I can do better elsewhere? I wouldn't want to pay for an appraisal and jump through lots of hoops just for a deal that is 0.1% better.

thanks!

I totally agree on the fixed rate. In the past, mortgage borrowers have typically come out ahead by taking a variable rate mortgage. However that was then and this is now. We are certainly in a strange time economically, so I wouldn't necessarily be so quick to make a decision based on past performance. Right now, you can get a 5 year fixed as low as 2.84%. The lowest available 5 year variable is prime -0.70%, a difference of 0.54%. While this may sound like quite a savings, the difference was typically between 1.00% - 2.00% when borrowers usually came out ahead with a variable rate mortgage. A much narrower gap means elevated risk. The Bank of Canada makes an interest rate announcement 7 times per year. They only have to increase the prime rate three times (at 1/4 % each time) for the variable rate to exceed the fixed in this example. While there is some room to play (especially considering the prime rate hasn't changed since September 2010).

For those die-hard variable rate seekers, you may want to consider a 3 year fixed at 2.49%. This is only 0.19% higher than the variable rate of 2.30%. The Bank of Canada only has to increase the prime rate a single time for the two rates to be even. At the end of the three year term, there 'may' be deeper discounts on variable rate mortgages, and a larger gap between fixed and variable rates.

There are some predictions that the Bank of Canada won't raise their prime rate until sometime in 2016. EVERYTHING however is speculation. Will you come out ahead with a variable rate vs. a 5 year fixed rate at the end of 5 years? No one can tell you for sure. Why I suggest for my clients really comes down to their risk threshold. Do you feel comfortable knowing that your rate and payment can increase? Or do you prefer the security of knowing you have a super low mortgage rate for the next 5 years guaranteed? Still undecided? A good happy medium is the 3 year fixed at 2.49% as I suggested.

Hope this helps!

 

[nfitz]

Reviving an old thread --

My mortgage is up for renewal in August; it's been prime minus 0.625 for six years at BMO. The current offer that BMO has for me is 5-yr variable prime minus 0.5 (prime is currently 3.0), or 5-year fixed at 2.99% They say it's the best deal they will offer. Forumers -- which do you think is a better deal thinking about interest rates over the next few years?

Ah, rates are dropping again! My 5-year prime minus 0.85 came up for renewal just over a year ago, and the best I could get out of the big banks was prime minus 0 variable or 2.99% fixed for 4 years. If I'd have pushed real hard, I might have been able to get it down to prime minus 0.1. So I went fixed, given the rate was pretty much the same. I kept hear then how rates would be going up. 14 months later ... no sign of that happening. But I guess prime hasn't gone down either ...

How much are rates going to go up, and how fast? No answer I'm afraid ...

 

[ponyboy]

two weeks ago BMO was offering 2.99 fixed for 5 years. Now the best they are offering is 3.12 fixed for 5 years. The 5-year variable is prime minus 0.5, an offer good until the end of month.

I think I'd take the 2.99 fixed, but I may have just missed the boat on that one.

Are there costs associated with moving to another lender? I'm with BMO, and don't want to pay any expenses to move it, or do a lot of leg work. Also the 20% prepayment privileges is based on my original mortgage amount, so this is much larger if I stay with BMO.

 

[Paul Meredith]

Ah, rates are dropping again! My 5-year prime minus 0.85 came up for renewal just over a year ago, and the best I could get out of the big banks was prime minus 0 variable or 2.99% fixed for 4 years. If I'd have pushed real hard, I might have been able to get it down to prime minus 0.1. So I went fixed, given the rate was pretty much the same. I kept hear then how rates would be going up. 14 months later ... no sign of that happening. But I guess prime hasn't gone down either ...

How much are rates going to go up, and how fast? No answer I'm afraid ...

two weeks ago BMO was offering 2.99 fixed for 5 years. Now the best they are offering is 3.12 fixed for 5 years. The 5-year variable is prime minus 0.5, an offer good until the end of month.

I think I'd take the 2.99 fixed, but I may have just missed the boat on that one.

Are there costs associated with moving to another lender? I'm with BMO, and don't want to pay any expenses to move it, or do a lot of leg work. Also the 20% prepayment privileges is based on my original mortgage amount, so this is much larger if I stay with BMO.

All these rates being quoted are quite expensive when compared with that is available out there. You can get a 5 year fixed for as low as 2.75% providing it is closing within 30 days, although prepayment privileges are limited to 5%. For closings up to 120 days, you can get a 5 year fixed for 2.85% with full 15% prepayment privileges.

For variable rate mortgages, you can get as low as prime -0.75% (2.25%), although, for only 0.24% more, you can get a 3 year fixed for only 2.49%.

As far as how fast will rates go up? No one can really say for sure. It could be years before we see any significant increase in fixed mortgage rates. Or we could see it later this year. No one knows for sure. Last spring, 5 year fixed mortgage rates went up 3/4% within just a few short weeks, only to start falling back down earlier this year. It's quite possible rates could even fall lower than the numbers I have mentioned.

Hope this helps!

 

[OolloO]

I do believe that variable is still your best bet. You just need the rate to average out less than the current fixed rate over the 3-5 year term.

There is a reason why most banks give you an option to lock in a fixed rate when you have variable, but never the other way around.

Great site for rate comparisons, mortgage calculators, principal and interest payments, etc...
http://www.ratehub.ca

5 year variable rate comparison
http://www.ratehub.ca/best-mortgage-rates/5-year/variable?mortgageAmount=250000&amort=25&province=ON

This is just my humble opinion, which I do follow with my own mortgages.

 

[Paul Meredith]

I do believe that variable is still your best bet. You just need the rate to average out less than the current fixed rate over the 3-5 year term.

There is a reason why most banks give you an option to lock in a fixed rate when you have variable, but never the other way around.

Great site for rate comparisons, mortgage calculators, principal and interest payments, etc...
http://www.ratehub.ca

5 year variable rate comparison
http://www.ratehub.ca/best-mortgage-rates/5-year/variable?mortgageAmount=250000&amort=25&province=ON

This is just my humble opinion, which I do follow with my own mortgages.

Variable might be right for some, but for most people the fixed will be the better option. The spread between variable and fixed is just too close for it to make sense for most. As I mentioned earlier in the thread, the spread between fixed and variable right now is only 0.19% when you compare the lowest variable of 2.30% with the lowest fixed, which is a 3 year at 2.49%. A single increase to prime rate, and you are already in a losing situation. yes, it depends on when the increase comes, and you have to look at the average rate over the term, but there is just no breathing room here. Even if you compare with the 5 year fixed at 2.75%, the spread is still only 0.45%. Better, but it's important to keep in mind that in the past when people have come out ahead with variable rate mortgages, the spread was always between 1-2%. Now we are talking less than half of the low end of that scale, which gives you an elevated risk.

 

[DearSummer]

There is a reason why most banks give you an option to lock in a fixed rate when you have variable, but never the other way around.

Obviously they can't let you switch from a fixed rate to a variable rate mid-term, or that would defeat the purpose of a fixed rate.

 

[DearSummer]

What are the best 10-year fixed rates out there? I've seen numbers in the 4-5% range online. Is that realistic? Seems like a no-brainer to me to lock in at those rates for a decade.

 

[OolloO]

Variable might be right for some, but for most people the fixed will be the better option. The spread between variable and fixed is just too close for it to make sense for most. As I mentioned earlier in the thread, the spread between fixed and variable right now is only 0.19% when you compare the lowest variable of 2.30% with the lowest fixed, which is a 3 year at 2.49%. A single increase to prime rate, and you are already in a losing situation. yes, it depends on when the increase comes, and you have to look at the average rate over the term, but there is just no breathing room here. Even if you compare with the 5 year fixed at 2.75%, the spread is still only 0.45%. Better, but it's important to keep in mind that in the past when people have come out ahead with variable rate mortgages, the spread was always between 1-2%. Now we are talking less than half of the low end of that scale, which gives you an elevated risk.

You are right, there is a certain risk involved with variable. If you are risk adverse, it may be better to go with fixed. An additional question to ask you self when deciding, has the US\Canada economy recovered such that rates will increase?

Over the last 6-7 years with a spread of less than 1%, anyone who has gone variable would be on top of those who had gone fixed. There is a reason banks only let you switch from variable to fixed and NEVER the reverse. I cannot stress this point enough.

In the end it depends on comfort level. Right now getting a mortgage with these historically low rates you can borrow large sums of money for as close to nothing as you'll ever get. Rates only have one way to go right now, its just a matter of when...

 

[OolloO]

Obviously they can't let you switch from a fixed rate to a variable rate mid-term, or that would defeat the purpose of a fixed rate.

This sentence can make the same amount of sense with the the words "fixed" and "variable" interchanged....

 

[DearSummer]

This sentence can make the same amount of sense with the the words "fixed" and "variable" interchanged....

No it doesn't. A variable rate can always be fixed at a later date. The reverse is not true. It seem your aren't "getting" the whole fixed vs. variable rate thing.

A variable rate is lower because the borrower holds the risk of increasing rates. A fixed rate is higher because the bank holds the risk of increasing rates. If you could switch from a fixed rate to a variable rate at anytime, everybody would take a fixed rate because you get the protection against increasing rates along with the upside of being able to take advantage of falling rates. It's the equivalent of having your cake and eating it too.

 

[OolloO]

No it doesn't. A variable rate can always be fixed at a later date. The reverse is not true. It seem your aren't "getting" the whole fixed vs. variable rate thing.

This sentence can make the same amount of sense with the the words "fixed" and "variable" interchanged....

Just kidding

I agree with your explanation completely. You are paying a premium when putting the risk on the bank and a discount when on yourself. If at some point during the term you want to put the risk on yourself for a discount for the remainder of the term, you should be allowed to switch at least once. Similar for a variable to fix. I think you're omitting the fact that banks win 90%+ of the time with a fixed rate. They know this and take advantage of it hoping the consumer is unaware of the statistics.

 

[Eug]

I think you're omitting the fact that banks win 90%+ of the time with a fixed rate. They know this and take advantage of it hoping the consumer is unaware of the statistics.

This was based off a study done a few years back, using comparative historical rates (with the appropriate discounts off posted). However, the author of that same study says that his study does not apply to current rates, since variable rates can no longer fall, and the only direction it can go is up. In fact, he states that while variable rates could still win, he personally thinks now is a time where fixed rates make a lot of sense.

 

[OolloO]

This was based off a study done a few years back, using comparative historical rates (with the appropriate discounts off posted). However, the author of that same study says that his study does not apply to current rates, since variable rates can no longer fall, and the only direction it can go is up. In fact, he states that while variable rates could still win, he personally thinks now is a time where fixed rates make a lot of sense.

You mean the BMO Nesbitt Burns study? The one from the bank?

http://www.bnn.ca/News/2014/3/13/Fixed-mortgages-now-trump-variable-BMO.aspx

I agree with you that fixed rates may do better, but I just wanted to put some points out there for variable so that it's not counted out. Regardless, it's a great time to get a mortgage with these rates, fixed or variable. I think my parents had an 18% mortgage rate at some point. Too bad house prices are not as great.

 

[James]

My very first mortgage was a fixed rate, simply because I didn't want the uncertainty of a fluctuating interest rate. Since then I've always gone with variable. I still believe most mortgagors (i.e. homebuyers) benefit from a variable rate but, as already noted in this thread, with the smaller spread between the fixed and variable rate, you're not that far behind with a fixed rate.