Mortgage rates

[TrickyRicky]

Hey, thanks Paul for attempting to answer my question. I can assure you however that TD's mortgage calculations are different even for fixed rate mortgages. I have contacted them about it but have never gotten a reply. The other banks calculations only vary by a few dollars and cents depending on how they round or truncate their numbers. CIBC mortgage numbers for instance don't require any methodology fudging. On the other hand RBC seems to round or truncate their numbers in ways.

 

[ponyboy]

All else being equal, what do you thinks is better? --

2.59% fixed for 3-years
2.89% fixed for 5-years

 

[Paul Meredith]

Hey, thanks Paul for attempting to answer my question. I can assure you however that TD's mortgage calculations are different even for fixed rate mortgages. I have contacted them about it but have never gotten a reply. The other banks calculations only vary by a few dollars and cents depending on how they round or truncate their numbers. CIBC mortgage numbers for instance don't require any methodology fudging. On the other hand RBC seems to round or truncate their numbers in ways.

If you are getting different numbers from TD, then there has to be a reason why. Something else they are adding in, as all mortgage lenders in Canada calculate the same way. If you go to TD's mortgage calculator on their website, you will get the identical number as you would with RBC, or BMO or any other Canadian mortgage calculator. If you are getting a different number from them, it would be the first time I have seen it in 7 years in the business. Like I said, I would continue trying to get ahold of them and find out 'why' they are charging you a different payment.

 

[Paul Meredith]

All else being equal, what do you thinks is better? --

2.59% fixed for 3-years
2.89% fixed for 5-years

Firstly, you can get as low as 2.49% for a 3 year fixed and as low as 2.74% for a 5 year fixed (However for those rates your mortgage must close in 60 days and 30 days respectively). I will however you use the rates you posted for comparison so I can help you to make a decision.

Assuming a $300,000 mortgage with a 25 year amortization and monthly payments, you will save $2,660.06 after the first three years by taking the 3 years at 2.59% over the 5 years at 2.89% (if you went with the 2.49% 3 year fixed, this number would jump to $3,542.24). Assuming still you stay with the 2.59%, your break even rate would be 3.42%. What this means is the rate for a 2 year fixed at the end of your 3 year term (to round out the 5 years) would have to be more than 3.42% for you to come out ahead with the 5 year fixed. If the 2 year rate is less than 3.42%, then you will come out ahead with the 3 year fixed.

So what to do ? You would have to have a crystal ball to know for sure, and it is really up to your risk threshold. If you feel more comfortable knowing you have a great rate locked in for the next 5 years than go with the 5 year fixed. If you feel relatively confident that rates will remain low over the next few years and are willing to take that chance, than go with the 3 year fixed. I personally would do the 3 year fixed.

Hope this helps!

 

[Eug]

For calculating my fixed rate mortgage, this is my excel equation, that I got from someone off the net:

=(((1+$D$4/2)^2)^(14/365)-1)*F128

$D$4 is my interest rate of 2.89%.
It's 2.89%/2 squared because it's compounded semi-annually.
F128 is the previous principal balance on which the current interest is calculated.
It's every two weeks, hence the 14/365.

So, (((1+0.0289/2)^2)^(14/365)-1)*(previous balance) = current interest amount.
If say the current principal balance is $300000, and the rate is 2.89%, and it's being paid every two weeks, then the interest amount is:
(((1+0.0289/2)^2)^(14/365)-1)*(300000) = $330.35
If your payment is say $1500, then the principal payment is $1169.55.
That means after the payment the remaining principal is $298830.45.

For the next pay period, the equation is (((1+0.0289/2)^2)^(14/365)-1)*(298830.45) = $329.06 interest.

I'm usually bang on, but occasionally, I'm off by 1¢, which is really annoying for my OCD personality. Calculation worked with multiple different banks, although instead of the 14/365 for biweekly payments, I was using 1/12 for a monthly payment.

Try it and see if you get the same numbers.

All else being equal, what do you thinks is better? --

2.59% fixed for 3-years
2.89% fixed for 5-years

Depends on you. Where are you in the amortization? For example, if you're near the beginning, the 5-year may prove attractive for the extra 2-years of peace of mind but then again, it might not because you know you're paying 0.3% more. However, that's a heluvalot better than paying say 1.8% more for 10-year fixed vs a 5-year fixed. I know we have been saying this for years, but interest rates may really start to rise in the next year or so.

2.89% is an excellent 5-year fixed rate. 2.84% is possible, but if your existing lender is offering you 2.89%, then I'd take it, and avoid the extra fees and hassle involved with switching lenders.

BTW, when I called my bank for a renewal, they offered me 3.29%, and that was the lowest the phone rep could offer immediately. I said no thanks, because 2.89 - 2.99% were available to me elsewhere. The next day they approved 2.89%. IOW, all it took was some minor negotiation over the phone to get 0.4% chopped off their "best" rate. I guess they really like to start high with their rates for customers that are not as well informed.

 

[ponyboy]

Many thanks Paul and Eug! I really appreciate the insight and time you've taken. I'm leading toward the 3 year because my balance is low enough that I should be able to pay it off lump sum at the end in case rates really jump come renewal time (I'm at 107K now, and with some prepayments, perhaps down to 50K balance at the end of 3 yrs). Not much of a downside to the lower shorter rate for me. I don't mind keeping a mortgage for longer if rates stay really low. But I'm not as optimistic about the stock market going forward, so may put excess cash toward the mortgage over the next while.

 

[Eug]

But I'm not as optimistic about the stock market going forward, so may put excess cash toward the mortgage over the next while.

That's what I'm doing.