Is variable rate good at this moment?

[emg]

As the bank of canada announced yesterday rates are going to stay the same.. I know there is no way to predict where they are going to be and maybe some of you will agree that it is difficult for variable rates to go down. I would like to know what are people's opinions on this topic

Thank you in advance

[Zonny]

In my limited experience, variable rate wins over a fixed rate.

When we got our first mortgage, we went fixed rate, safest thing for the newbies. But the next renewal, we went variable and have had a lower rate than we ever had. I'm sure we've saved more than enough to make the variable rate a winner for the past few years.

I don't think you can spend too much time worrying about when the rate increase will come.

There was a major jump back in the 80s which is scary. I'm not a finance professional, but I think that MOST rate increases since then have been small. We have our payment at a level that does not change unless there's a major jump in prime rate. We pay more than we need to, but we do so because we can. This is our only debt, we want the mortgage gone. Our mortgage is about eight years old, we've never had our payment jump.

Good luck!

[brunt]

In times of flat to falling interest rates, variable rate is king. For the last 20 years, we have seen almost continuously falling rates, so variable rates have worked out very well.

Now, my opinion is that rates will start increasing within the next 12 months. In the very least, they don't have very much further to fall. Personally, I would try to lock in the best possible 5 year rate right now or within the next six to eight months.

But again I stress that this is my opinion, which often tends to be in the minority.

[ashedfc]

But again I stress that this is my opinion, which often tends to be in the minority.

Absolutely, its the contrarian thinking (always in minority) wins. General crowd is mostly incorrect, its the herd mentality where everyone gets attracted to a similar thinking & eventually get slaughtered.
In recent memory, herd mentality can be witnessed in
1. Tech bubble: where one had to buy Nortel or else life was useless...
2. Housing mania: You gotta own a house, & rent is like throwing money, & you are building equity, bla bla bla, now everyone knows, this global financial mess is because of housing bubble bursting (infact the second leg of the housing bust has just started in US; even in Eurozone debt problems of Greece/ Spain/ Ireland/ Portugal & now Italy is all related to housing)
3. Now the Bond Bubble: Most of the money (retirement funds, pension funds, institutional funds, etc) has moved into the heavily overpriced bond market. Once interest rates starts moving, its a disaster waiting to happen.. Its the biggest of all (built over 3 decades).

Regarding interest rate: Historically interest rates are in a 3decade downward trend, it can't go any lower & gradually it has to rise... (its already at zero in the US, it can't go below zero, & US is the largest & the most liquid bond market in the world, so their rate actually sets the global trend), ....
Most people currently speculating in the Canadian/Australian/Swedish housing market have not witnessed the double digit interest rates. (other places housing is still bust). Or those who have witnessed the 80's interest rate have very short memory, & now believe it can't happen again.

In reality either of the 2 will happen:
1. Economy improves & interest rates go up (or)
2. Economy does not improve (or deteriorates) & interest rates stay low, but than housing will fall apart due to a weaker economy.

So the question is Variable rate or Fixed rate:
Next 1 or 2yrs or even 3yrs variable rate will stay below the fixed, but over the longer time frame, rates will go up.
So going for a fixed will create frustration that you are paying more money now, but you are buying peace of mind with the extra payment..
If you decide to go with variable rate, than you will be saving some money, but you are exposing yourself to any increase in interest rates.

So my personal suggestion for those going for a variable rate is: save the difference in an inflation hedge, so you are more prepared when interest rates go up.

[kanewtz]

Also, with Variable, you have a lower interest rate, meaning more of your payment goes to principle than to intrest, meaning you're saving money in the long-run by paying down the principle in the beginning quicker.

[ashedfc]

Also, with Variable, you have a lower interest rate, meaning more of your payment goes to principle than to intrest, meaning you're saving money in the long-run by paying down the principle in the beginning quicker.

Not really!!!
Its actually depends on the amortization, for a person taking a new mortgage "the principal amount paid monthly is based on the yrs of amortization, & it will be the same for fixed or variable"..
However, for existing variable rate mortgages (in some cases- your statement is true), as they have 2 option
1. Change the total monthly mortgage payment with every change in interest rate
2. Keep the same monthly payment & change the interest/principal portion, so if interest goes down than more principal is paid, & if interest goes up than less principal is paid.

One has to check the terms & conditions of their variable rate mortgage as to what kind of option is built into their existing mortgage:

Note: Its not advisable to depend too much on home equity as a store of wealth, http://blogs.telegraph.co.uk/finance...scandal-worse/

[brunt]

Also, with Variable, you have a lower interest rate, meaning more of your payment goes to principle than to intrest, meaning you're saving money in the long-run by paying down the principle in the beginning quicker.

This is true in an environment of flat or falling interest rates. It is unfortunately not true at all in an environment of rising interest rates.

While your statement has held true for the last 30 years or so as rates fell from 21% down to 3% or so, as I mentioned earlier, interest rates have little further to fall.

[kanewtz]

Not really!!!
Its actually depends on the amortization, for a person taking a new mortgage "the principal amount paid monthly is based on the yrs of amortization, & it will be the same for fixed or variable"..
However, for existing variable rate mortgages (in some cases- your statement is true), as they have 2 option
1. Change the total monthly mortgage payment with every change in interest rate
2. Keep the same monthly payment & change the interest/principal portion, so if interest goes down than more principal is paid, & if interest goes up than less principal is paid.

One has to check the terms & conditions of their variable rate mortgage as to what kind of option is built into their existing mortgage:

Note: Its not advisable to depend too much on home equity as a store of wealth, http://blogs.telegraph.co.uk/finance...scandal-worse/

My bad...however when I got my mortgage, the advisor explained it like that to me.

Doesn't really matter. I pay an extra 100% of my mortgage each month.

That's another thing to look out...the principle payment options. Doubling up, lump sums, increased payments.

[dagney]

We went with a variable rate last summer but we pay something like 1/2% more to have a ratecapper so currently at 3% but guaranteed not to go over 5 1/2%. I lived thru the 80's and had friends lose their house over huge rate increases. Our morgage is not huge but gives me some piece of mind.

[save_girl]

Compare the variable rate you will get with the fixed rate you would get for the term you are considering. Do the math for a few scenarios of interest rate rising - how many years do you think it will be before the variable rate is higher than the fixed rate you are looking at, for example. Nobody knows the answer to this so you have to go with how fast you feel it will rise and how much, but you can calculate how much you could save or lose based on a few scenarios and assess how comfortable you feel with these outcomes.

[MortgageQueen]

Right now, I'm leaning towards suggesting a fixed rate for my Mortgage clients. This is completely New for me as I've always been a Variable fan.

At the moment, I'm getting a 5 year fixed rate of 3.56% for my clients. When you think about it, our prime rate is now 3%. Most economists agree it will be going up in July (maybe only .25% though) Now while I get -.8 off prime for variable (2.2% right now) the prime rate will probably start slowly but steadily climbing over the next few years. . . so with the spread only being 1.36% now, I think it's a fairly safe gamble.

On the other side of the coin, the perks to a variable rate is 1. your rate is lower (for now) 2. If you think you may relocate/sell/refinance within the next 5 years, your penalty is substantiallylower.

Hope this helps. Feel free to PIN me if you have more questions.

[kuldip sharma]

As per my personal view, Variable rate is better than fix. I believe bank hired the smartest people to decide & fix interest rate. If bank fix some interest rate, will never fix to make loss. You can never win over bank. However exceptions are there.
Moreover you pay high IRD to cancel your mortgage before term. You dont need to do math to find what is good. Bank is more knowledgeable then us.

[MortgageQueen]

As per my personal view, Variable rate is better than fix. I believe bank hired the smartest people to decide & fix interest rate. If bank fix some interest rate, will never fix to make loss. You can never win over bank. However exceptions are there.
Moreover you pay high IRD to cancel your mortgage before term. You dont need to do math to find what is good. Bank is more knowledgeable then us.

It's not really about winning or losing against the banks. Fixed rates are a direct reflection of the bond market. While our historical lows were last year, we are still very very low. The rates will rise. Frankly, with the world economy as shaky as it is, my gut feeling tells me to lock in at these low fixed rates.
I don't argue that variable is slightly better right now, but for the small difference between the two, I think the "secured" rate is a better way to go. . .and for the record, that is the opposite of my past opinion. I have always gone variable myself, but even "I" locked in to a fixed mortg. Never thought I would do that!

[BarbMichea]

I work in the financial services industry. We find that rarely does the consumer come out ahead with a variable rate. As a rule, a fixed rate will serve you better. If you check independent sources--not banks--you will find fixed rates are generally reccommended as the best way to go, and get the longest term you can get. Fixed 25 and 30 year terms are still available!

[Shwa Girl]

Great question, OP. Tried to rep. you but I reached my limit, I guess.

I work in the financial services industry. We find that rarely does the consumer come out ahead with a variable rate. As a rule, a fixed rate will serve you better. If you check independent sources--not banks--you will find fixed rates are generally reccommended as the best way to go, and get the longest term you can get. Fixed 25 and 30 year terms are still available!

I agree, especially for first time home owners.
I am not a financial person.
We try do what kanewtz does -- pay extra biweekly to the principal payment. It's only $100 more going to principal every two weeks. Then at the anniversary, we check the balance in our emergency fund and decide on a lump sum extra principal payment, if we can afford it. Our mortgage allows up to 30% extra to principal at the anniversary and up to 30% extra to principal biweekly.
We got 5.3% for 7 years and have 1.5 years left on this mortgate.
Yes, we could break the mortgage, pay a penalty and get a better rate, but since we are first time home owners, we sleep better at night with the above payment scenario.