Should You Lock Your Variable Rate Mortgage?
Wondering when to lock in your variable rate mortgage, or what your lock in options are? If that is one of the mortgage questions you have right now you might find this video over at the Globe and Mail helpful.
Help, I Have A Variable Rate Mortgage
The other interesting thought to take from this is that variable rate mortgages typically have a payout penalty of only three months payments. Think about how you can leverage that to reduce any payout penalties (maybe these should really be called mortgage profit centres instead of payout penalties) if you want to get great rates and you are unsure how long you will stay in a property.
Investor Perspective – Variable Rate Mortgages
As an investor myself I think variable rate mortgages are ideal. They lower my payment, they increase my cashflow and more of my payment goes towards the principal instead of interest.
The downside, rates will increase at some point and my payments will go up, my cashflow will go down and slightly less of my principal will get paid down.
There is a way you can offset this though. Virtually all the banks allow you to increase the mortgage payment amount by at least 10%. If your variable rate payment is currently $1,100 per month, and your cash flow permits it, simply boost the payment by 10% (or more if allowable and the property still works) to $1,210 per month.
If rates increase, you have already built in a cushion, so you won’t feel the hit. If rates stay where they are you still win. You’ll just want to confirm that the banks apply the extra payment directly to principal, which is to your advantage, and not to prepay interest, which is to their advantage. This can shave years off your mortgage by getting the principal paid down that much quicker.
Creating wealth with Real Estate is a long term strategy and knowing how to position yourself early can help fulfill that strategy just a little bit sooner!
Had variable for the past 2.5 years at Prime less 80 bps, and I recently switched to a 5 year fixed at 3.59%. Rates are going up, and I was able to take advantage of the low rate of prime over the past 2.5 years and wanted the security of a fixed for the next 5. It doesn’t look like a great decision now and probably not next year, but years 3-5 I think it will be a smart move.
Hey Trevor, prime minus .8 is great and it really does come down to the comfort level for people. Traditionally variable works out to save people money long term, but we know rates will be inching up over the next few years. The big question is, will it be a couple percent, or more. You can also temper that with how long you expect to stay in the property. The payout penalties involved with breaking a fixed rate mortgage are ludicrous versus a variable rate, so if you expect to sell your property prior to the mortgage being due it can be a costly choice. the good news for a typical homeowners mortgage though is that it can often be ported to another property to avoid penalties.
Thanks for the feedback,
Bill
Have had a variable rate mortgage ever since we bought our first house 25 yrs ago. Noting else made sense. If I was ever concerned about rates going up, I would go for a shorter term 6 months or a year at most. As I felt more comfortable with the stability of future rates I would go for longer terms.
Great tactic Theode,
We started by going shorter two or three year terms with our first house and then as we learned more about variables, we went that direction. Rates can basically only go up at this point, the question is how fast and if it’s slowly going variable will still leave you ahead, if it’s fast, then you still have the option to lock in later if need be.
Bill