5% fixed v 6% variable

[nt4maximusd]

This is probably a dumb question for whatever reason but figured I’d ask it on here. The 5% results in some meaningful savings. I feel like interests rates aren’t coming down that much in the near future. It’s a 5 year term. Interested in informed opinions. I know there is no crystal ball.

 

[leodrone]

@nt4maximusd Variable rate mortgages often cost less to break. The penalty to break a fixed rate mortgage can be high but usually variable rate mortgages only cost three months interest to break. If you're thinking of selling or refinancing at some point in the near future, variable could be the way to go.

 

[resjudicata]

@leodrone Im still trying to wrap my head around the selling and rebuying process but cant you sometimes port a fixed mortgage to avoid breaking it in the case of selling?

 

[nt4maximusd]

@resjudicata This is my understanding as well.

The mortgage is ported over to the new property, and assuming the new property is more expensive even after down payment, the mortgage amount is increased.

 

[ladydahila]

@nt4maximusd My experience with the higher amount was that it was setup as second mortgage for the difference. The problem with that is that it took some time to get the terms aligned. Otherwise when renewing you will have the larger penalty on one if shopping around for best rate.

 

[isaacnewton]

@ladydahila Usually it’s blended. The existing balance and rate blended proportionally with the newly funded amount at current rates

 

[ladydahila]

@isaacnewton I think that may be an institutional difference. My experience was with Scotia

 

[isaacnewton]

@ladydahila Fair, mine was RBC

 

[paladin6]

@nt4maximusd I just bought a new house in September. We ported the old mortgage and added on a new chunk. Here’s how it works in made up numbers: port old mortgage of $400k fixed at 2% and added another $200k at like 5%. Blended rate was like 3% for $600k

 

[nt4maximusd]

@paladin6 So you can’t add the new amount under the same terms as the existing mortgage eh?

 

[zeal777]

@nt4maximusd No, the additional funds have to be priced at whatever the current rate is, with the new total 'blended' togehter...The bank entered into a hedge/swap to lend you those dollars at that fixed rate - they can only add new dollars to the mortgage at whatever the rate is now.

 

[resjudicata]

Yes but I think the person you’re replying to is talking about the scenario where interest rates plummet. So you’re still paying 5% but new mortgages are at 2-3% - it may be worthwhile to break your mortgage (though the penalties get worse the larger the spread)

 

[resjudicata]

Ya gotcha

 

[leodrone]

@resjudicata Definitely. Porting is a good way to avoid the penalty. Depending on the value of the mortgage on the new property vs. the old property, some or all of the penalty can be refunded.

 

[charlotte99]

@leodrone Getting a low fixed rate pretty much has no down sides, since you will pretty much pay what a variable pays to break if interest rates are a lot higher than what you got.

Case in point, you can pretty much break any 2% mortgage right now for the price of fixed.

Really shows that the mantra "variable averages out better" really is wrong when rates are lower than the average.

 

[leafis]

@leodrone I always thought you didn't need to "break" a variable. Like with fixed you are locked in, but I thought with variable you could just go and lock in a fixed at any point if you become uncomfortable with variable.

Sort of like with mobile phones. If you sign a contract you are locked in for 2 years. If you are on BYOD monthly, at any point you can just go sign a 2 year contract and end the monthly.

Is variable not like that?

 

[cazareeforie]

@leafis I just got a variable mortgage and to cancel the mortgage it’s $380 flat fee. Main reason I went with variable (in case I ever want to sell/move).

 

[etainmacintosh]

@cazareeforie Depends on whether the mortgage is open or closed.

 

[cazareeforie]

@etainmacintosh I think mine is closed as I have this fee if I want to pay early, but the fees are so small maybe it’s an open mortgage?

 

[leodrone]

@leafis In terms of converting from variable to fixed (or fixed to variable), different lenders have different rules. What I am talking about specifically is breaking the mortgage. If you want to sell your house, you have to "break" the mortgage and pay it out entirely. It's called breaking because you're cancelling your mortgage before the terms is up (assuming you're not selling at the end of your term). To do this, lenders charge a penalty and will do so regardless whether it's fixed or variable. If it's fixed, the penalty can be high. If it's variable, the penalty is usually only three months interest.