Is a variable mortgage still the way to go?

I like to keep a one year mortgage for several reasons. First, it often offers you a better rate, second, you can always negotiate every year and third, you can always switch to a better deal with another bank, even though in Canada the big 5 have a monopoly and there is really very little competition. Banks love to sell 5-year mortgages because they get you for 5-years. In my opinion, 5 year mortages are too long. Once you have signed, the banks will treat you like a piece of crap and if you ever need to move or sell, they will make you pay to the roof in 'processing fees'

anything below 3% is great rate o a fixed term

I had the choice of going with an open mortgage with variable rate of 1.75% or a 5 year term at a fixed rate 4.5% 2 years ago. My mortgage principal was $750,000. Guess which one I chose. I couldn't care less if rates go up. I can always pay off the principal when necessary.

@Jack. Agreed. We signed this year @ Prime - 75 and are now at 2.25% and sleep quit well. We are planning to pay extra since we have a very flexible mortgage for next five years and take advantage and know others who did the same. We bought less house than we pre-qualified for, had 20% down and waited until our car was paid off before we even looked. Boring? Maybe. Lucky? No. The harder we work, the luckier we get. Do what feels right but dont let fear mongering scare you into paying thousands extra in interest for possible peace of mind against possible large increases in rates.

Do what feels right but dont let fear mongering scare you into paying thousands extra in interest for possible peace of mind against possible large increases in rates.

That is what happened to a lot of people who lost their homes when the rates went up a lot. I just locked my in for 4 years at 3.01%. I may pay a but extra but I will not loose my home of the rates jump.

@Jack. Keep in mind--that 'peace of mind' is only for four years. You will then be paying the going market rate anyway.

I've owned 5 houses since 1994 and I locked in fixed rates of 5-8% each time, usually for 3-5 years. Needless to say, I was paying through the nose for a decade and a half! Last year I got a 5 year variable for the first time and I'm sleeping much better.

@ Jack

What you should have done is go with the variable rate but keep your payments the same as if you were paying the fixed rate. The end result is that even if rates go up you would be paying interest on a much lower principal amount.
I switched my mortgage on my $230K property and the difference in rates means I'm paying off my mortgage $260 more in principal a month by keeping my payments they same. Doesn't sound like much, but over 5 years that amounts to$15,600 which is substantial.

On a $750K mortgage well the savings would be a lot more, and probably closer to $40 - 60,000 over five years. That's enough for a new car.

We just re-negotiated our mortage. We had been on a rate of prime - .85% and now we are at prime - .4%. We slept just fine over the past 5 years, and ignored those that "got scared" and moved to a fixed rate of 5%. (my sister was one of them)

Needless to say, she has been paying 5% for the past 2 years and deeply regrets her decision, causing her no to sleep at night. If she had paid below prime the past 2 years, and made extra payments, she would be in a much better situation right now.

Let's think long and hard people. We are on the brink of what could be Europe's worst financial crisis in history, and our wonderful US neighbours not being able to pay their bills, all the while cutting every damn social program they can find. Are interest rates going to jump anytime soon? I highly doubt it. If our government had even a lick of sense (and I question that most days) they would not, to stave off any kind of effect on our economy. We are the only country that raised interest rates, and so at least they do have somewhere to go if things get bad (meaning down)

@ Debbie,

Yes, you are correct. My friend who has his Economics degree says he doesn't see the interest rates moving too much over the next few years.

I'm jealous and wish I could have locked in when the mortgages were prime -1 or -1.25%.

hehehe... Ah well, now just to pay it down faster.

Variable rate at prime -.85 leaves us way below the 5 yr fixed. Nobody is offering 5 yr fixed at 3.25% like this article says - lowest our broker can find is high 4%. I am going to take my chances on the fact that if BoC raises the rate to 5% they KNOW they will bankrupt a third of the country because that is exactly what triggered the collapse in the US - as soon as they started raising the rates, people started defaulting.

We've been in the game a long time and presently have 6 houses, all mostly paid for by tenants. Variable rates, usually @ prime -.8 have saved us countless thousands of dollars over the years and paid off those houses years earlier than we expected. I fully expect the future short to medium term will be no different (an interest differential of 2% is huge!). By the way, self-directed RRSP mortgages are the only way to go. Write off the interest against rental income, growth tax free in your RRSP, and you don't have to worry about your investments going down the toilet. Once we did that with all of our RRSP money we really slept better, and our net worth just keeps growing, it is not sexy by it works. You get the best of both worlds

Variable rates are the way to go if interest rates stay low. Am I worried that the people lending money will get nervous as governments around the world keep printing more money while the economy shrinks (Rome Burns as it were)? Yes. If you were lending money out would you be happy with a 2% return when inflation is running at 5% and there is rampant "Quantitative Easing". I just have this feeling that 1981/1982 will return and Canada will experience House price falls that will make people in Detroit wince.

I sold my house and got into a new one a year and a half into my mortgage. I had a five year fixed rate and my bank penalised me to recoup the interest on the remaining 3.5 years of the term, even though I was going into a bigger mortgage! I tried to negotiate but they wouldn't budge, so I took all my business to another bank.

If I was going to have to pay 18k in penalty, I would at least save some face by having them lose my business for life!

I am pretty sure this is not the case with variable, so if you change mortgages you will not be burdened by these dirty "double dipping" penalties. It should be illegal for banks to pull such stunts.

Variable rates are the way to go. How you really make them work is to pay the amount that you would of paid based on your best fixed rate, so if the rates do rise you will have more paid down on the principle. If they do rise a few percent your payment probally wont change much, and then you can always stretch out your amrotization slightly if you need too.
Remember you must make the bigger payments for this to work.

You have asked an excellent issue. I do be in agreement with your piece of writing. It is all about put into practice.

@LC...You apparently misunderstood my post. I DID go with the variable rate mortage. Why would you even think that I would have been stupid enough to go with the much higher fixed rate for a 5 year term? Although my interest rate is only 1.75%, I can pay much more than the required amount per month. I always double up each month, plus put lumps sums of $55,000 every 6 months.

I am American and looking to work with some Canadian family members to buy in the US. For various reasons, we will be borrowing in Canada and taking advantage of depressed US market. The loan offered is a 5/1 with 30 year amortization. I understand that Canada's banking system is more stable and has been over last ninety years. However, you did seem to face same crazily high crippling inflation and interest rates that we did in late 70's/early eighties. I am assuming inflation is going to hit US like a rocket in the coming years. Should I be worried about Canada's rates. We may or may not want to stay or have to stay in this house for 5-8-10-15 years, and I don't want to have to sell and lose because of some rate hike. If I were to tell someone here that I was doing a variable, they would say I was crazy. Here, we have 30 year fixed, which puts stress on banks, but to be able to lock in at a really low number is great right now. Obviously you can't do in canada, so I am worried about future. I guess what I want is to know rate for life of loan or to know that canada has some policies in place that we don't have that will prevent some crazy rate hike that will ruin my life. If canada exports natural resources maybe you don't care as much about inflation, as why would you care about prices of finshed goods, like we have to care about. Since us doesnt make as much anymore, maybe we don't care about inflation, only growth. I know what I would do here, fixed rate, can some canadian help me feel at peace by jumping into your apparently stable and thriving system. BTW, going in a few weeks and can't wait to get some tim horton's