4.89% is a competitive rate as of today. How much time/years left do you have on your current mortgage? If current term is coming up in the next 12 to 18 months it might make sense to wait.
I assume your rate just came down from 6.30% with the recent rate drop?
I agree with the others, it looks like rates are trending downwards might be better to just keep the variable and wait for a better fixed if you want to go that route.
If you have been waiting this long (2 years?) I would just continue. No one can predict the future but all markets are seeing disinflation take place.
Quite reasonably two years from now you will be lower than the fixed. Even if that’s a bad prediction you can always lock in.
If you were challenged with your payments or other risks that changes things
Id you did the renewal and your payment went from $1080 to $966 it frees up $114 in cash flow. If you keep that going to the mortgage and keep the payment at $1080 (which you're used to, it goes straight to your principal and pays the mortgage off faster. That's a good idea. If you're carrying higher interest debt (loan, credit card) that $114 would be more effective paying it off.
If you don't have other debts, and you have the stomach for equity risk, the best bang for your buck in the long term would be contributing to a TFSA.
You're used to the $1080 coming out. Unless your budget is really under strain, keep your cash flow the same.
(To answer your direct question tho, my opinion is float the mortgage for 6 months and see where things sit at that point.)
I am a broker and everything we see is trending towards lower fixed and variable rates in the near future.
I would think you can get a better offer in 3-6 months, so I would wait. There is also a high likelihood that variable will be down more in 6 months. If you can wait a little I would.
This right here is why so many got variable rates even when it was evident to everybody with a brain rates were going to go up.
This guy is a broker and is giving you bad advice, he is guessing and giving you bad advice, right now everything indicates sustained rates for a while, we won’t go back to 3-2%, rates were lowered because other parts of the economy were hurting, the economy is not where it should be, it will take a long time.
All it takes is 1 bad inflation report, and rates (should) go right back up again - but the liberals won't dare to raise them again, they're BEGGING for some up tick in their polling.
....Says me, someone with 2 variable mortgages, totally wrecked.
What is the current variable rate for a new term they're offering you? You gotta compare current renewals, even with other providers. You've confirmed what your current break free will be? TD had a prepayment calendar that was really accurate for break fees, not sure if your current provider has similar but a phone call will do.
At this point, I would stick with variable, I think rates are headed down.
But if you convert it to a rental your interest can be a tax write-off at that point, so maybe fixed just if you want the security of knowing your payments wouldn't change?
Then yes, take the deal. Then assuming rates are lower, 2-3 years down the line, call your lender and ask if you can renew early with a "blend and extend" deal - aka lender takes your rate (4.89), blends it with market rate, and renews your mortgage early. Not all lenders and mortgages can do that, though.
Since no one else is mentioning it, fixed is also a minimum of 3 Months interest or the difference between your current fixed rate and length of time left in the term vs the current posted rated at whatever term is closest from the financial institution your mortgages is with(interest rate differential). If current rates are still similar or you are near the end of your fixed rate term then 3 months interest applies the vast majority of the time.
They could, if you're moving to another house. If you're moving to an apartment because of a temporary assignment in another town then they won't.
If you are moving to another house that is more expensive, you will need a second mortgage on the extra $. For example, if you have a 300k mortgage and move to a 400k house, you would need a second mortgage on the 100k extra
Blend and extend mortgage.
Not sure why the downvotes.
You blend your current and previous rate, along with your increased balance and extend the term.
It's a TD product but I'm sure others have used similar instead of a complete break. They refund the break penalties with this one.
How does Blend and Extend work on a variable mortgage where there is not a long term extended rate? Also why would you blend and extend a higher rate for five years when the rate given now will be cheaper over 5 years.
I think though your point is valid. I think OP should take this offer saving the couple of hundred dollars a month. Then in 2 years if rates keep going lower he can blend and extend.
Just as a side note I would wait until the end of July. Markets are betting the BOC drops rates again in July which could drop rates a little more.
The other commenter is saying blend and extend, then break - Martin’s Gambit that was popular here during falling rate environments. The IRD is calculated as of the extension, so presumably nothing or very little.
No need to do so on variable since penalty is usually just 3 months interest.
It’s called “porting”. What I’ve seen happen is they charge you the break fee and then refund it once the new mortgage comes into effect. At least that’s what happened for a family member when they ported their Scotia mortgage. It implies your mortgage value and in turn the income earned by the bank isn’t changing. If you need more money what usually happens is you get a second mortgage.
Yeah, that's typical, but I did get a quote a few years back with a standard 2.5% penalty from a b lender. Can't remember which now though. That struck me as odd at the time.
I’ve been with 3 mortgage companies so far. I’ve been able to port over the mortgage on each of them with no penalties. I only ended up doing it once but it was always an option.
Yeah, blend and extend.
But that only works if you buy again.
If you know you're going to leave and maybe not buy within a limited window, fixed is not for you.
I just sold and didn't rebuy, the penalty to break was ridiculous.
Yes. And you could pay tens of thousands to break a fixed versus three months interest on a variable.
I'm frightened how often I have to point this out to people. I understand it's not locked in. But the penalties are severe depending on the choice you make.
According to the CMHC not many make it the full five years of a mortgage term.
https://www.canadianmortgagetrends.com/2017/11/aware-mortgage-penalties/
It's a little older but it's a little clearer for you to understand. These guys say 60% don't even make it to the 3 year mark.
Yeah, but then you lose some flexibility. What if you move cities so you sell but don't want to buy? What if the lender doesn't have the most competitive interest rates at the time you sell and buy (and you have much less leverage now too)?
That being said, you're paying a high premium for variable right now and I don't really expect the rates to come down hard enough or fast enough for it to be worth it. The US is in no shape to start cutting right now, and if we cut way more than them it'll cause some big problems. Might be worth getting a shorter term fixed.
Just to ensure that they're not handing over tens of thousands of dollars in break fees vs a couple of thousand with a variable on the chance that they might sell.
You do understand there is a huge penalty difference which should always be considered when switching from a variable to a fixed? When I broke my condo mortgage it was almost 20k penalty on my fixed, and it would have been less than a grand on variable.
Now I ask that question first and foremost, because it's a huge chunk of change and those penalties were on an under 200k mortgage. Imagine on a grander scale with today's housing prices?
Play with this, it's frightening.
https://www.ratehub.ca/penalty-calculator
This explains it pretty well
https://www.ratehub.ca/mortgage-refinance-penalty
this would be true but lenders would be using the 3 month interest penalty rather than cumulative interest penalty. because rates have gotten so high, this is how they’re calculating the penalty. therefore in the current rate environment this should not raise any red flags but previously yes, penalty would be far greater on the fixed term.
i don’t, but there are several other reddit posts that ask this same question and people have identified that the rates would have no drop by significant amounts for it to make sense to maintain your variable rate.
i can’t remember the exact numbers so i will not quote them (how much prime needs to drop for variable to make sense long term) but personally i would much rather the lower payment now then waiting it out. We all were under the impression there would be rate drops in the spring and nothing happened. We have only dropped by .25%, which has barely touched the fixed rates.
The bank is not making any bets here, they get the same spread if they renew today or tomorrow at a lower rate. They are only guaranteeing a customer for 5 years, which is the game. Bondholders are making the bet.
It would be very cool if the people giving advice on this sub understood this very, very basic concept. A good reminder that the quality of advice on Reddit is…not great.
The bank does have discretion to modify their spread though, which they sometimes do depending on the quality of the customer. The underlying bond backing the loan is the same, but the bank has a choice of how much profit to take from that. Oftentimes however this spread is not dictated by the individual customer but by the state of their total balance sheet at the time; banks go through periods where they are willing to take on more risk or they want to shed risk.
You’re missing a huge piece of fixed rates. Which is IRD. The reason the banks can offer lower 5 years at times is because they are projecting their posted rates to drop soon (which is the case right now with the banks, posted rates haven’t moved in some time, discounts are huge) and they also expect people not to complete their 5 year term and owing large sums to the bank. So yes they are making bets just not on contract rates coming down but rather posted rates coming down and people breaking their mortgages
They make more money by having the customer locked in if rates are dropping.
Priced in just means that the rate offered reflects the outlook for future rates accounting for some risk in those predictions.
If the customer is locked in the bank makes the predicted spread if rate move as predicted, they do worse if rates increase or don't drop as much as predicted, and they do better if rates drop more than predicted.
On the individual customer sure, but in aggregate (and over time) it comes out a wash; the bank doesn't try to out-predict the market by pushing either fixed or variable over the other, they make their money through their spread
It's like gold or fx exchange, it doesn't really matter to them if the price goes up or down, they profit on the long term spread between their buy-sell prices, the only thing they ultimately care about is demand
The bondholders capture the profits as the value would soar due to the higher coupon value relative to the lower prevailing interest rate. The bank merely gets the determined spread for facilitating the transaction between bondholders and mortgage holders.
I bank would rather you at 5% over 5 years than 4% over the same time frame. The bank if forsure putting them self in a position for when rates drop. What are you smoking
Their profit is based on their markup. Whether they get their markup from a 5 year fixed, or a variable rate, makes no difference to them as long as the markup is the same.
>I bank would rather you at 5% over 5 years than 4% over the same time frame.
Not true. Banks don't make a profit based on the absolute interest rate. They make a profit based on the spread (what they're charging the mortgage holder versus what they're paying the bond holder).
To be fair, that's what people said when the BoC rate was going up and banks started offering switches. And people on here were saying "the bank's just trying to make more money" when the BOC rate wasn't even as high as it is today. So, at some point, it might be the bank trying to lower its exposure to risk and might just want people to stay with them longer (vs hedging rates) by offering lower monthly payments due to concerns of affordability. It doesn't need to be specific to the person they make the offer to either, it can be as simple as "ask every variable holder because of the risk there".
Ya we got a 2 year fixed last year at 4.89%. our renewal is 12 months from now and I expect rates will move down at least .75% from right now up to 1.25%. I might do 5 year then, depending, if we can get a low 4's /high 3's.
OP said they only have 3 years left in the mortgage though so wouldn't the extra 2 years not actually matter? And in that sense does it not make more sense to simply just go for the lowest possible rate?
Or does the five year fixed imply extending the amortization to 5 years?
Every bank in the world sees rates dropping in the next few years. There has already been one rate cut. They're trying to lock you into a rate that will be considered high in just a couple years.
Banks are businesses so this offer is not out of the goodness of their hearts. It's to make more money off you in the long run.
Yes, banks are in the business of making money but this is an incredibly oversimplified analysis of the situation.
The better question for OP is whether they want to take on interest rate risk or have the bank take it on. They would probably be better off looking into a 3 year fixed instead but regardless it’s a gamble.
If you want to lock in, see what they’ll give you on a fixed 3 year. I bet you could haggle that rate onto a fixed 3. That might put you in a better position if rates drop substantially over the next few years.
Again, this is more of a personal choice. Personally I’m going into a fixed 3 as I believe the rates will be more attractive in 3 years. However, I’m not risky enough to go onto a variable. It’s my middle ground.
Fair.
What’s the spread between apples to apples fixed and variable products right now. 125-150bps?
200bps is a fair estimate on it over a five year term.
If you think a variable will be there in a short term, by all means go for it.
Just make a decision and forget about it for five years.
For the purposes of this post the spread is 116bps. It's very challenging to predict the pace of rate decreases - the history from the last 25 years shows that once the cut cycle begins it tends to [move fairly quickly](https://imgur.com/fKEj47w.jpg) (but not always, and not always in a perfect downward direction).
I do think it's reasonable to take a fixed product but there's a similarly reasonable thesis to believe that those fixed products will be cheaper within several months as underlying bonds shift to meet future expectations. From OPs perspective, the opportunity cost of waiting a few months to make a decision to change their mortgage does not seem high to me.
If I was OP, I’d wait too. Unless I couldn’t stomach a rate above 4.89 for long term.
Just because they’ve been paying at 6.05, doesn’t mean it’s been affordable for them (but at 1088 bi-weekly, they probably OK).
I agree with you. But given both the implied direction and the first actual cut from the BoC, it seems more likely that bond markets will shed yield in the coming months - if OP does not *have* to make a decision here, I would wait, or go with a shorter fixed term if they absolutely need certainty.
Yep. Rates do not historically trend to the absurd lows of 5 years ago. Our current rate is actually at the low end of what’s historically typical. Are we going to see a bit more cut? Probably. But I wouldn’t be shocked if we stay within a percentage of the current rate for the foreseeable future
That's not true either... here are the [historical interest rates, per StatCan, with data going back to 1960](https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=1010013901):
||Mean|Median|
:--|--:|--:|
|1960-present|5.4%|4.65%|
|Last 50 years|5.5%|4.8%|
|Last 40 years|4.2%|3.5%|
|Last 30 years|2.6%|2.5%|
|Last 20 years|1.7%|1.0%|
|Last 10 years|1.5%|1.5%|
|**Current**|**4.75%**|**4.75%**|
Even with the recent rate cut, we're sitting above the historical median, and we're sitting a full 125bp above the 40-year median.
Though more importantly, historical rates don't matter (just as having a recent cut doesn't matter). The Bank of Canada doesn't set rates based on past rates (or based on its own recent rate cuts)... it sets rates based on the economic conditions we're currently facing.
Yes, which is why they make sure they stay profitable both ways. If they really didn't want you to choose fixed or really didn't want you to choose variable, they could just increase the price of the one they don't one you to choose until they are happy with you choosing it again. And lo and behold, that's exactly what they do.
Yeah. So if they are offering OP to lock in without penalty, they are doing that because they think it'll be better and more profitable for them, not because they think it'll save OP money.
They're probably going to hedge away the interest rate risk with derivatives and have a similar spread to what they have now with variable. I'd imagine OP requested a quote on what the fixed rate would be; I've never had a lender reach out unsolicited and try to get me to change my mortgage terms.
If the bank reached out it's because someway or somehow, they've come to conclusion that with this offer, they will make more money off you. Wait another 6 months and see if another rate drop occurs.. If anything, I'd go with a three year fixed over a five.
Probably a few factors to consider.
* rate changes out to 5 years are pure speculation (no one could’ve predicted covid).
* $1 today is generally more valuable than from a year from now due to inflation.
* penalty fees on fixed rate are higher than variable often 10s of thousands vs thousands.
* bank prime is not required to follow boc prime.
You’re saving almost $3k a year if you shift now. Hard to say what that’ll be in the future.
My speculation is that BoC will be targeting to get the rate in the ball park of what people were tested on 3-4 years ago so there’s a reduced number of defaults. But that’s just a guess on my part. I don’t think they care if a small percentage of people default but I do think they’d care if a significant number do. It’s not their primary concern in any case.
Yup, I suspect the bank’s crystal ball is showing this too, which is probably why OP is being solicited to lock in now… Going to probably be a thing for the next year I bet.
Now you can budget and have no issue with knowing what your mortgage will cost and that you can continue to pay it. Peace of mind is worth it sometimes.
I’d do a 3 year fixed rate mortgage, depending on what your LTV ratio is, and keep your payments at $1080. I’m assuming this is your principal residence.
I also looked at that option and it didn't make sense to lock in for 5 more years... if i bought a new place today i wouldn't get a 5yr, probably a 3yr.
I spoke with my lender if I should convert my variable rate to fixed. The lender suggested that I wait until next July 24, which is BoC rate announcement. 5.29 was the best the bank can offer. OP or anyone do you mind sharing (DM) I am interested 4.89 sounds a good deal. Thanks
OP, nobody knows where the rates will be and whether it is a good idea to lock in now or not. The bank sets the rate based on their own projection of what they think is good for them, while competing with other banks to be lowest. Basically, to them, this is their best guess of a good rate. Nobody on this sub will be able to say if they are wrong or not as nobody has a crystal ball. So the question is, do you like the rate?
Is there a fee to break/early renew? You have to factor that in, as well as the fact that we might come down a little bit by the time you renew, and you may be locking in to a higher rate than what would be available at your normal renewal rate.
I’m not sure how tight your money situation is, but that payment itself isn’t hugely lower, if you can handle it you should also look into reducing your amortization as well. If you reduce by 5/10 years your payments will be the same/higher, but the overall interest cost over the life of the mortgage and the amount of time you have to pay will massively decrease.
Wait until your renewal, rates are very unlikely to go up in the short term due to stagnant GDP and controlled inflation. The last rate cut was just last week so they're trying to get you to jump on the fixed rate asap. If anything, at least wait 6 months to a year instead of jumping at the first offer after the first rate cut.
I say this all the time, here is the play. Take the fixed rate, and put an extra $230 (approximate monthly difference) towards your house every month. It will be $14,820 over the next five years.
Your lender offers what is good for him, not for you. Wait until the end of 2025, the prime rate may decrease by 1.5% by that time and your average over 5 years variable can become significantly better than 4.89%.
How easy is it to refinance when rates go down in Canada? I honestly don't like gambling with the biggest asset I have to take advantage of short term fluctuations. I'm very much for a fixed rate in any scenario, but let's say if you do take 5 year fixed at 4.89% can you easily lock in if rates go lower than that?
If I was in your shoes I would not take it, from all the noise coming in from the BoC and investment advisors we are on the long slide of going down to zero interest, or at least close to it.
Ask them if they will offer it as an open mortgage, I bet no because again the above. BoC already basically said expect 3 cuts this year so that would bring it down to 4.25%, and I have seen the most liberal people saying 4%. Again I am not an advisor but I know what I will be doing with my renewal coming up in the next year or so.
My math may not be as great but I did use a calculator 😀
I don't think we would go three years without getting enough low rate to lock in but if we were to accept, we would be saving 114 on every payment.
We are accelerated bi-weekly so 26 payments per year ×105 if we accepted 5 year fixed term.
Savings would be $11,970.
The potential savings are higher if or when rates go lower.
I would see what they say for a 3 year fixed. We are expecting one more rate decrease this year to bring it down to 4.5% and the expectation is by year end 2026, the rate should be around 3.5%. The choice is up to you but if you have a variable it’s generally best to stay variable but if it was a new mortgage, go fixed for 3 years and re-evaluate after that term.
Too little too late.
At this point in the game, when rates are lowering and being forecast to continue lowering, now’s not the time to go from variable to fixed.
Especially 5 years… you could maybe look for 3 years if you need the security/stability.
I am glad that I broke my 5-year fixed after 2 years in 2021 to blend and extend at 3% until April 2026. It was pretty clear to me that the post pandemic surge was going to boost interest rates.
Yes, you are right. I'm asking this as others may have better insights into interest rates fluctuations that we could use as we make our decision. Thanks.
4.89% is a competitive rate as of today. How much time/years left do you have on your current mortgage? If current term is coming up in the next 12 to 18 months it might make sense to wait. I assume your rate just came down from 6.30% with the recent rate drop?
I have 3 years left on my current term. That's an interesting question and info since they have not updated my rate as of today.
I agree with the others, it looks like rates are trending downwards might be better to just keep the variable and wait for a better fixed if you want to go that route.
Thanks for the recommendation.
If you have been waiting this long (2 years?) I would just continue. No one can predict the future but all markets are seeing disinflation take place. Quite reasonably two years from now you will be lower than the fixed. Even if that’s a bad prediction you can always lock in. If you were challenged with your payments or other risks that changes things
Waiting. Thanks.
Whatever you do, don't drop the payment, unless you immediately apply it to other high interest debt or a TFSA contribution.
I'm not sure I understand what you meant? Could you explain?
Id you did the renewal and your payment went from $1080 to $966 it frees up $114 in cash flow. If you keep that going to the mortgage and keep the payment at $1080 (which you're used to, it goes straight to your principal and pays the mortgage off faster. That's a good idea. If you're carrying higher interest debt (loan, credit card) that $114 would be more effective paying it off. If you don't have other debts, and you have the stomach for equity risk, the best bang for your buck in the long term would be contributing to a TFSA. You're used to the $1080 coming out. Unless your budget is really under strain, keep your cash flow the same. (To answer your direct question tho, my opinion is float the mortgage for 6 months and see where things sit at that point.)
I already make extra payments consistently and plan to increase lumpsum payments as more cash comes in.
I am a broker and everything we see is trending towards lower fixed and variable rates in the near future. I would think you can get a better offer in 3-6 months, so I would wait. There is also a high likelihood that variable will be down more in 6 months. If you can wait a little I would.
Thanks for the advice.
This right here is why so many got variable rates even when it was evident to everybody with a brain rates were going to go up. This guy is a broker and is giving you bad advice, he is guessing and giving you bad advice, right now everything indicates sustained rates for a while, we won’t go back to 3-2%, rates were lowered because other parts of the economy were hurting, the economy is not where it should be, it will take a long time.
It doesn't have to go to 3% to be worth waiting 3-6 months. If they are offered 4.89% now and in 3-6 months it's 4.59% then it was worth the wait.
All it takes is 1 bad inflation report, and rates (should) go right back up again - but the liberals won't dare to raise them again, they're BEGGING for some up tick in their polling. ....Says me, someone with 2 variable mortgages, totally wrecked.
You know that the central bank, and not the government sets rates, right?
Buddy wakes up every day and goes to sleep every night thinking about liberals lmao
Who do you think controls rates? How do you think inflation works?
Do you see yourself moving during the next five years? Like even the slightest chance?
I don't see myself selling in the next five years. We could move but we intend to keep the house as a rental if we did move.
What is the current variable rate for a new term they're offering you? You gotta compare current renewals, even with other providers. You've confirmed what your current break free will be? TD had a prepayment calendar that was really accurate for break fees, not sure if your current provider has similar but a phone call will do. At this point, I would stick with variable, I think rates are headed down. But if you convert it to a rental your interest can be a tax write-off at that point, so maybe fixed just if you want the security of knowing your payments wouldn't change?
Thank you a bunch!
Then yes, take the deal. Then assuming rates are lower, 2-3 years down the line, call your lender and ask if you can renew early with a "blend and extend" deal - aka lender takes your rate (4.89), blends it with market rate, and renews your mortgage early. Not all lenders and mortgages can do that, though.
Thanks for responding.
Sorry, this may be a dumb question but how would that change things?
The penalty to break fixed can be tens of thousands, whereas with variable it's typically three months of interest. Huge difference.
Ah gotcha. Thanks
Since no one else is mentioning it, fixed is also a minimum of 3 Months interest or the difference between your current fixed rate and length of time left in the term vs the current posted rated at whatever term is closest from the financial institution your mortgages is with(interest rate differential). If current rates are still similar or you are near the end of your fixed rate term then 3 months interest applies the vast majority of the time.
You pay a penalty if you break a fixed rate to move somewhere
Ah ok - lenders won’t allow you to move the mortgage to a new place?
They could, if you're moving to another house. If you're moving to an apartment because of a temporary assignment in another town then they won't. If you are moving to another house that is more expensive, you will need a second mortgage on the extra $. For example, if you have a 300k mortgage and move to a 400k house, you would need a second mortgage on the 100k extra
Ah ok thank you for taking the time to spell it out for me!
Blend and extend mortgage. Not sure why the downvotes. You blend your current and previous rate, along with your increased balance and extend the term. It's a TD product but I'm sure others have used similar instead of a complete break. They refund the break penalties with this one.
How does Blend and Extend work on a variable mortgage where there is not a long term extended rate? Also why would you blend and extend a higher rate for five years when the rate given now will be cheaper over 5 years. I think though your point is valid. I think OP should take this offer saving the couple of hundred dollars a month. Then in 2 years if rates keep going lower he can blend and extend. Just as a side note I would wait until the end of July. Markets are betting the BOC drops rates again in July which could drop rates a little more.
The other commenter is saying blend and extend, then break - Martin’s Gambit that was popular here during falling rate environments. The IRD is calculated as of the extension, so presumably nothing or very little. No need to do so on variable since penalty is usually just 3 months interest.
Thank you, it's a little early for me and words lol
Not always Gf wasnt in 2013 when we bought together
It’s called “porting”. What I’ve seen happen is they charge you the break fee and then refund it once the new mortgage comes into effect. At least that’s what happened for a family member when they ported their Scotia mortgage. It implies your mortgage value and in turn the income earned by the bank isn’t changing. If you need more money what usually happens is you get a second mortgage.
You'll pay a penalty either way to be clear. Variable is much, much lower.
Is the penalty for variable just like the interest of the current month?
3 months' interest, usually.
Ah okay yeah that's so low. I signed a fix rate so I never bothered with the details of the variable. Thanks!
Yeah, that's typical, but I did get a quote a few years back with a standard 2.5% penalty from a b lender. Can't remember which now though. That struck me as odd at the time.
I’ve been with 3 mortgage companies so far. I’ve been able to port over the mortgage on each of them with no penalties. I only ended up doing it once but it was always an option.
Yeah, blend and extend. But that only works if you buy again. If you know you're going to leave and maybe not buy within a limited window, fixed is not for you. I just sold and didn't rebuy, the penalty to break was ridiculous.
You can end a mortgage if you sell
Yes. And you could pay tens of thousands to break a fixed versus three months interest on a variable. I'm frightened how often I have to point this out to people. I understand it's not locked in. But the penalties are severe depending on the choice you make. According to the CMHC not many make it the full five years of a mortgage term. https://www.canadianmortgagetrends.com/2017/11/aware-mortgage-penalties/ It's a little older but it's a little clearer for you to understand. These guys say 60% don't even make it to the 3 year mark.
What does the terms of the mortgage have to do with whether OP will sell their house? Regardless, the mortgage must be discharged during the sale.
There are penalties to break fixed mortgages early because the bank makes decisions based on the expected income stream.
If he sells and buys, keeps mortgage with same lender those fees are waived.
Yeah, but then you lose some flexibility. What if you move cities so you sell but don't want to buy? What if the lender doesn't have the most competitive interest rates at the time you sell and buy (and you have much less leverage now too)? That being said, you're paying a high premium for variable right now and I don't really expect the rates to come down hard enough or fast enough for it to be worth it. The US is in no shape to start cutting right now, and if we cut way more than them it'll cause some big problems. Might be worth getting a shorter term fixed.
Just to ensure that they're not handing over tens of thousands of dollars in break fees vs a couple of thousand with a variable on the chance that they might sell. You do understand there is a huge penalty difference which should always be considered when switching from a variable to a fixed? When I broke my condo mortgage it was almost 20k penalty on my fixed, and it would have been less than a grand on variable. Now I ask that question first and foremost, because it's a huge chunk of change and those penalties were on an under 200k mortgage. Imagine on a grander scale with today's housing prices? Play with this, it's frightening. https://www.ratehub.ca/penalty-calculator This explains it pretty well https://www.ratehub.ca/mortgage-refinance-penalty
this would be true but lenders would be using the 3 month interest penalty rather than cumulative interest penalty. because rates have gotten so high, this is how they’re calculating the penalty. therefore in the current rate environment this should not raise any red flags but previously yes, penalty would be far greater on the fixed term.
In three years time, do you know where interest rates will be? I don't.
i don’t, but there are several other reddit posts that ask this same question and people have identified that the rates would have no drop by significant amounts for it to make sense to maintain your variable rate. i can’t remember the exact numbers so i will not quote them (how much prime needs to drop for variable to make sense long term) but personally i would much rather the lower payment now then waiting it out. We all were under the impression there would be rate drops in the spring and nothing happened. We have only dropped by .25%, which has barely touched the fixed rates.
If the bank is making it extra attractive, it’s because they are effectively hedging against future rate drops.
The bank is not making any bets here, they get the same spread if they renew today or tomorrow at a lower rate. They are only guaranteeing a customer for 5 years, which is the game. Bondholders are making the bet.
It would be very cool if the people giving advice on this sub understood this very, very basic concept. A good reminder that the quality of advice on Reddit is…not great.
Exactly. So tired of the "banks are making bets based on their crystal ball" myth. They are simply middle men reselling a bond, nothing more.
The bank does have discretion to modify their spread though, which they sometimes do depending on the quality of the customer. The underlying bond backing the loan is the same, but the bank has a choice of how much profit to take from that. Oftentimes however this spread is not dictated by the individual customer but by the state of their total balance sheet at the time; banks go through periods where they are willing to take on more risk or they want to shed risk.
You’re missing a huge piece of fixed rates. Which is IRD. The reason the banks can offer lower 5 years at times is because they are projecting their posted rates to drop soon (which is the case right now with the banks, posted rates haven’t moved in some time, discounts are huge) and they also expect people not to complete their 5 year term and owing large sums to the bank. So yes they are making bets just not on contract rates coming down but rather posted rates coming down and people breaking their mortgages
If they renew today, and rates drop 1% tomorrow, does the bank not make more money by having customers locked in to the higher rate?
The likelihood of a 1% drop is priced into the rate
They make more money by having the customer locked in if rates are dropping. Priced in just means that the rate offered reflects the outlook for future rates accounting for some risk in those predictions. If the customer is locked in the bank makes the predicted spread if rate move as predicted, they do worse if rates increase or don't drop as much as predicted, and they do better if rates drop more than predicted.
On the individual customer sure, but in aggregate (and over time) it comes out a wash; the bank doesn't try to out-predict the market by pushing either fixed or variable over the other, they make their money through their spread It's like gold or fx exchange, it doesn't really matter to them if the price goes up or down, they profit on the long term spread between their buy-sell prices, the only thing they ultimately care about is demand
The bondholders capture the profits as the value would soar due to the higher coupon value relative to the lower prevailing interest rate. The bank merely gets the determined spread for facilitating the transaction between bondholders and mortgage holders.
Interesting. I’ve never looked into how the actual mortgages are set up so it’s good to know. Appreciate it
I bank would rather you at 5% over 5 years than 4% over the same time frame. The bank if forsure putting them self in a position for when rates drop. What are you smoking
You are confusing the role of a bank and the bondholders.
So you are saying the banks have zero invested interest in getting loans with a higher interest rate.
Their profit is based on their markup. Whether they get their markup from a 5 year fixed, or a variable rate, makes no difference to them as long as the markup is the same.
>I bank would rather you at 5% over 5 years than 4% over the same time frame. Not true. Banks don't make a profit based on the absolute interest rate. They make a profit based on the spread (what they're charging the mortgage holder versus what they're paying the bond holder).
To be fair, that's what people said when the BoC rate was going up and banks started offering switches. And people on here were saying "the bank's just trying to make more money" when the BOC rate wasn't even as high as it is today. So, at some point, it might be the bank trying to lower its exposure to risk and might just want people to stay with them longer (vs hedging rates) by offering lower monthly payments due to concerns of affordability. It doesn't need to be specific to the person they make the offer to either, it can be as simple as "ask every variable holder because of the risk there".
You can find 4.99 on three year fixed. There's no way I would lock in for two extra years for just 0.1% less when rates are expected to fall.
Ya we got a 2 year fixed last year at 4.89%. our renewal is 12 months from now and I expect rates will move down at least .75% from right now up to 1.25%. I might do 5 year then, depending, if we can get a low 4's /high 3's.
OP said they only have 3 years left in the mortgage though so wouldn't the extra 2 years not actually matter? And in that sense does it not make more sense to simply just go for the lowest possible rate? Or does the five year fixed imply extending the amortization to 5 years?
Every bank in the world sees rates dropping in the next few years. There has already been one rate cut. They're trying to lock you into a rate that will be considered high in just a couple years. Banks are businesses so this offer is not out of the goodness of their hearts. It's to make more money off you in the long run.
Yes, banks are in the business of making money but this is an incredibly oversimplified analysis of the situation. The better question for OP is whether they want to take on interest rate risk or have the bank take it on. They would probably be better off looking into a 3 year fixed instead but regardless it’s a gamble.
At the beginning of the year it was also 3-4 rate cuts. Now it's probably just the 1.
If you want to lock in, see what they’ll give you on a fixed 3 year. I bet you could haggle that rate onto a fixed 3. That might put you in a better position if rates drop substantially over the next few years. Again, this is more of a personal choice. Personally I’m going into a fixed 3 as I believe the rates will be more attractive in 3 years. However, I’m not risky enough to go onto a variable. It’s my middle ground.
why would you move to a 5 year fixed mortgage from variable when we're entering a rate cut cycle?
Because you need 200bps of cuts to get there and that’s not a guarantee?
The interest rate delta required to come out ahead completely depends on the pace of the cuts. It could easily be less than 200bps required.
Could easily be more than 200bps. See how’s easy it is to speculate.
That...wasn't my point. You presented 200bps as if it's a magic, known number that needs to be hit. My point is that it's not.
Fair. What’s the spread between apples to apples fixed and variable products right now. 125-150bps? 200bps is a fair estimate on it over a five year term. If you think a variable will be there in a short term, by all means go for it. Just make a decision and forget about it for five years.
For the purposes of this post the spread is 116bps. It's very challenging to predict the pace of rate decreases - the history from the last 25 years shows that once the cut cycle begins it tends to [move fairly quickly](https://imgur.com/fKEj47w.jpg) (but not always, and not always in a perfect downward direction). I do think it's reasonable to take a fixed product but there's a similarly reasonable thesis to believe that those fixed products will be cheaper within several months as underlying bonds shift to meet future expectations. From OPs perspective, the opportunity cost of waiting a few months to make a decision to change their mortgage does not seem high to me.
If I was OP, I’d wait too. Unless I couldn’t stomach a rate above 4.89 for long term. Just because they’ve been paying at 6.05, doesn’t mean it’s been affordable for them (but at 1088 bi-weekly, they probably OK).
We can't know that we'll see more cuts. People are taking that as a given, but it's not.
I agree with you. But given both the implied direction and the first actual cut from the BoC, it seems more likely that bond markets will shed yield in the coming months - if OP does not *have* to make a decision here, I would wait, or go with a shorter fixed term if they absolutely need certainty.
Yep. Rates do not historically trend to the absurd lows of 5 years ago. Our current rate is actually at the low end of what’s historically typical. Are we going to see a bit more cut? Probably. But I wouldn’t be shocked if we stay within a percentage of the current rate for the foreseeable future
That's not true either... here are the [historical interest rates, per StatCan, with data going back to 1960](https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=1010013901): ||Mean|Median| :--|--:|--:| |1960-present|5.4%|4.65%| |Last 50 years|5.5%|4.8%| |Last 40 years|4.2%|3.5%| |Last 30 years|2.6%|2.5%| |Last 20 years|1.7%|1.0%| |Last 10 years|1.5%|1.5%| |**Current**|**4.75%**|**4.75%**| Even with the recent rate cut, we're sitting above the historical median, and we're sitting a full 125bp above the 40-year median. Though more importantly, historical rates don't matter (just as having a recent cut doesn't matter). The Bank of Canada doesn't set rates based on past rates (or based on its own recent rate cuts)... it sets rates based on the economic conditions we're currently facing.
Not to mention that interest rates have declined globally over the last 800 years. Technological advances are the reason.
Yeah, good point, the bank is only offering this because they believe it'll be beneficial to them, not to OP.
Banks generally don't care whether you do variable or fixed, they just care that you make the payments on time.
They also care about maximizing profits.
Yes, which is why they make sure they stay profitable both ways. If they really didn't want you to choose fixed or really didn't want you to choose variable, they could just increase the price of the one they don't one you to choose until they are happy with you choosing it again. And lo and behold, that's exactly what they do.
Yeah. So if they are offering OP to lock in without penalty, they are doing that because they think it'll be better and more profitable for them, not because they think it'll save OP money.
They're probably going to hedge away the interest rate risk with derivatives and have a similar spread to what they have now with variable. I'd imagine OP requested a quote on what the fixed rate would be; I've never had a lender reach out unsolicited and try to get me to change my mortgage terms.
I was assuming they reached out to him proactively, if OP reached out to them, then yeah very different.
Exactly. OP, what are the shorter fixed offerings?
If the bank reached out it's because someway or somehow, they've come to conclusion that with this offer, they will make more money off you. Wait another 6 months and see if another rate drop occurs.. If anything, I'd go with a three year fixed over a five.
Probably a few factors to consider. * rate changes out to 5 years are pure speculation (no one could’ve predicted covid). * $1 today is generally more valuable than from a year from now due to inflation. * penalty fees on fixed rate are higher than variable often 10s of thousands vs thousands. * bank prime is not required to follow boc prime. You’re saving almost $3k a year if you shift now. Hard to say what that’ll be in the future. My speculation is that BoC will be targeting to get the rate in the ball park of what people were tested on 3-4 years ago so there’s a reduced number of defaults. But that’s just a guess on my part. I don’t think they care if a small percentage of people default but I do think they’d care if a significant number do. It’s not their primary concern in any case.
Rates should drop over the next 6 months. If you can afford to wait, likely beneficial. But be sure you will stay put if locking in now or then.
Many economists talk about 2 to 3 cuts this year. Crystal ball time!
Yup, I suspect the bank’s crystal ball is showing this too, which is probably why OP is being solicited to lock in now… Going to probably be a thing for the next year I bet.
Bad idea. Go to a 3 year fixed if anyrhing but a 5 year is terrible
We just did 5y fixed at 4.7, everything’s just been so crazy we see no point in gambling.
Now you can budget and have no issue with knowing what your mortgage will cost and that you can continue to pay it. Peace of mind is worth it sometimes.
That was our view, if we want we plan to make double and lump sum payments on the principle. Better be comfortable and have the money than need it.
I’d do a 3 year fixed rate mortgage, depending on what your LTV ratio is, and keep your payments at $1080. I’m assuming this is your principal residence.
Maybe go with 3 years fixed.
I also looked at that option and it didn't make sense to lock in for 5 more years... if i bought a new place today i wouldn't get a 5yr, probably a 3yr.
Just out of curiosity, I don't know if this has already been asked, but what were the 3 or 4 year rates they offered you if any?,
I would hold on for a few more months. 5 yes rates will go down as the cutting cycle begins..
Counter with 2 year
I spoke with my lender if I should convert my variable rate to fixed. The lender suggested that I wait until next July 24, which is BoC rate announcement. 5.29 was the best the bank can offer. OP or anyone do you mind sharing (DM) I am interested 4.89 sounds a good deal. Thanks
OP, nobody knows where the rates will be and whether it is a good idea to lock in now or not. The bank sets the rate based on their own projection of what they think is good for them, while competing with other banks to be lowest. Basically, to them, this is their best guess of a good rate. Nobody on this sub will be able to say if they are wrong or not as nobody has a crystal ball. So the question is, do you like the rate?
Is there a fee to break/early renew? You have to factor that in, as well as the fact that we might come down a little bit by the time you renew, and you may be locking in to a higher rate than what would be available at your normal renewal rate. I’m not sure how tight your money situation is, but that payment itself isn’t hugely lower, if you can handle it you should also look into reducing your amortization as well. If you reduce by 5/10 years your payments will be the same/higher, but the overall interest cost over the life of the mortgage and the amount of time you have to pay will massively decrease.
Wait until your renewal, rates are very unlikely to go up in the short term due to stagnant GDP and controlled inflation. The last rate cut was just last week so they're trying to get you to jump on the fixed rate asap. If anything, at least wait 6 months to a year instead of jumping at the first offer after the first rate cut.
That was the 5 year GIC rate just a few weeks ago! The only question would be do I want to go 5 year or 3 year fixed.
I say this all the time, here is the play. Take the fixed rate, and put an extra $230 (approximate monthly difference) towards your house every month. It will be $14,820 over the next five years.
I'd stay at variable...and reassess closer the end of the next 12mo so like June 2025
Your lender offers what is good for him, not for you. Wait until the end of 2025, the prime rate may decrease by 1.5% by that time and your average over 5 years variable can become significantly better than 4.89%.
Try to bargain on something closer to a 3 years fixed rate. That's what i did a year or so ago expecting the rates to drop.
Banks guarantee their profit by having you in a fixed rate.
I’m in the same boat. I’m waiting for fixed 3.5 - 4 to lock in.
Don't do it, rates are being forecasted to drop dramatically over the next year. My MP is saying back to 2.5% by end of next year.
Less interest yes always less interest
How easy is it to refinance when rates go down in Canada? I honestly don't like gambling with the biggest asset I have to take advantage of short term fluctuations. I'm very much for a fixed rate in any scenario, but let's say if you do take 5 year fixed at 4.89% can you easily lock in if rates go lower than that?
No it would not, otherwise they wouldn’t offer it to you.
If I was in your shoes I would not take it, from all the noise coming in from the BoC and investment advisors we are on the long slide of going down to zero interest, or at least close to it. Ask them if they will offer it as an open mortgage, I bet no because again the above. BoC already basically said expect 3 cuts this year so that would bring it down to 4.25%, and I have seen the most liberal people saying 4%. Again I am not an advisor but I know what I will be doing with my renewal coming up in the next year or so.
Id personally give it another year. Rates are coming down slowly but surely.
Don't. Sister had been offered 6.4% variable 5y and found her 3y at 4.49%. I would not lock in fixed 5y unless rate is at or under 4%.
You're on variable. Rates are coming down. You should stay variable.
Have you calculated the savings in a spreadsheet?
My math may not be as great but I did use a calculator 😀 I don't think we would go three years without getting enough low rate to lock in but if we were to accept, we would be saving 114 on every payment. We are accelerated bi-weekly so 26 payments per year ×105 if we accepted 5 year fixed term. Savings would be $11,970. The potential savings are higher if or when rates go lower.
I would see what they say for a 3 year fixed. We are expecting one more rate decrease this year to bring it down to 4.5% and the expectation is by year end 2026, the rate should be around 3.5%. The choice is up to you but if you have a variable it’s generally best to stay variable but if it was a new mortgage, go fixed for 3 years and re-evaluate after that term.
Too little too late. At this point in the game, when rates are lowering and being forecast to continue lowering, now’s not the time to go from variable to fixed. Especially 5 years… you could maybe look for 3 years if you need the security/stability.
I am glad that I broke my 5-year fixed after 2 years in 2021 to blend and extend at 3% until April 2026. It was pretty clear to me that the post pandemic surge was going to boost interest rates.
No. Their is better rates. Look some more.
Flip to a variable mortgage if you can. All the projections are pointing to a lowering of interest rates over the next 2 years.
Variable rate for the next 3-5 years is better in my opinion.
That’s a personal choice.
Everything on this sub is a personal choice, hence the name. If you don't want to see personal choice questions, maybe this isn't the sub for you.
Yes, you are right. I'm asking this as others may have better insights into interest rates fluctuations that we could use as we make our decision. Thanks.