Thinking of buying a condo in Toronto (I know, the idea itself is a debatable one), but assuming I did make up my mind, what are your thoughts on Fixed vs Variable?
I’ve been a full supporter of Variable for most of my (limited) time of financial literacy, but the 5 year old “they have nowhere to go but up” statement seems to hold a little more weight than before (or for once I’m biased).
So the debate is… if you were buying right now… do you go for Prime - 0.65ish which puts you at 2.20 (maybe 2.15), or do you go with 2.79 fixed? I’m pretty torn here…
First - I always get a kick out of Canadians that view American borrowing as risky. We by far have riskier interest rate options up here. Anyways, that’s an aside. Folks have been calling for dramatically higher interest rates for awhile. Hasn’t happened. May not happen again for some time. You need to do a break even calculation based on your belief on where interest rates go. A few other considerations: - You can swap to fixed at any time from a variable with no penalty. If you have a stop loss type fixed rate where you know in advance you’ll swap over, that’d help. - The Canadian banks have kind of lied to us. Not having prime move with CDOR/Bank of Canada overnight is complete horseshit. Lets say you believe rates go 50 lower by end of year… Maybe BMO or whoever gives you 30 of that? On the way up, I can promise you they’ll take every point of increase. Its pure BS as far as I’m concerned. Canadian variable rate mortgage borrowers should be calling for rates fixed to 3mn CDOR rather than this prime rate crap. - If you’re a top credit, you may be able to negotiate prime less 1% right now. - Disclosure: I’ve split my risks. On a 5yr fixed at 2.79% on my house and a variable 5yr closed at 1.85% (p - 1%) on my rental. You can do a split on a single property as well. Just ask your bank. They should be able to do it.
On the 5 year fixed term, you are talking about a 20 or 25 year loan that requires re-financing every 5 years, correct? Can you choose variable after the first 5 year fixed term, or is the 5 year fixed more of a perpetually resetting fixed loan?
The standard Canadian mortgage is a 5 year loan with a 25 year amortization. Rate is fixed for 5 years and then the deal is renegotiated after. Variable rate is generally still a 5 year closed term, but the rate is Canadian Prime +/- a spread. Prime changes when the banks want it to. Of course you can do terms from 6mns to 10 years, but they are far less typical. The 30 year American style product is unavailable as far as I know. The typical mortgage is not a 25 year term, 5 year ARM though. The mortgage becomes due in full at 5 years and technically the bank could punt you (though this never happens, as they’d be shooting themselves… refinancing is just a defacto given in our system). So yes, to directly answer your question, you can switch to whatever you want after 5 years, its an entirely new mortgage. You can switch early too of course, there will just be a prepay penalty.
In terms of amortization being 25 year max, that was changed (I believe) about 5 years ago, when our central bank decided to tighten the mortgage regulations a bit (30 was available until then, and 35 a while back prior to that). The actual structure of having to renew once the (most popular) 5 year term is up - that’s been around for as long as I know.
The 30 year interest term? No idea why its not available. Our bank industry is not competitive at all so no one does anything different than the way it has always been. The likely answer to why we don’t have 30s is because the banks don’t benefit and therefore they don’t do it. This said, I was checking around this morning as this thread got me curious. You can get a 5 year fixed at 2.24% if you call around, credit unions in particular. There are also variables today available at prime less 1%. You might have to do some leg work, but don’t just take what RBC/BMO/TD offer. Just as another note on how awful the Canadian banks are: they actually have two rates, their competitive one and another posted rate. If you walk in off the street, they’ll offer you the post rate, which may be 4-5%. You need to ask for the real rate at 2.5% or whatever. This system is set up to prey on the older and the uneducated that blindly accept the higher rate as a best offer. I lost it at a local branch after one of these slick sales people tried to pass one of these rates off to my parents as a deal. Disgusting ethics.