About that mortgage …

Despite extraordinary economic conditions, I’m betting that variable is still the way to go.

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So I thought I had made up my mind about my mortgage. All the talk about the inevitable rise of interest rates in tandem with incessant warnings by Bank of Canada Governor Mark Carney that drastic measures were needed to rein in consumer borrowing had scared me into the security of a 5-year fixed mortgage with a rate of 3.49%.

But then people began writing me and stopping me in the halls at work to tell me I was making a mistake. The first to do this was my predecessor, freelance personal finance writer Bryan Borzykowski, who told me I was crazy. “Take the lower rate,” he said. “And throw as much money as you can at the principal over the next couple of years.”

My first thought was that his tales from fancy freelance land (where he now resides) were a sham and that he was angling to get back to the security and coziness we all enjoy here at MoneySense. But then I started to hear from people who actually knew what they were talking about (just kidding Bryan) and I decided to give variable some more thought.

After speaking with Nawar Naji, a Mortgage Broker with Mortgage Alliance in Toronto, I had a better idea of the big picture. Carney wants to raise interest rates, but the Chairman of the United States Federal Reserve, Ben Bernanke, has indicated that he expects to keep interest rates very low in order to stimulate the economy. Carney can’t get too far ahead of Bernanke or else the loonie will soar and will hurt our exports. His hands are effectively tied.

So what does this have to do with me? Well, rate hikes have historically happened in increments of 0.5% per year, which gives me four years of lower interest payments compared to a fixed rate mortgage. And if I can throw the financial equivalent of the kitchen sink at my mortgage in the meantime, so much the better.

So I made a last-minute change to my mortgage, much to the chagrin of my broker and lawyer, both of whom now face extra paperwork. A 3-year variable mortgage it is. Now I just need Ben Bernanke to keep his word and stay away from those interest rates.

What could possibly go wrong?

41 comments on “About that mortgage …

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  3. It's not that nothing can go wrong – it's that the probability is very low that anything will go wrong enough fast enough to make this mortgage a bad deal.

    As I suggested in a comment on your previous post – take the variable and set your payments as if you had a 5% fixed. That accelerates how fast you are paying down your principal, while insulating you from rate changes – the variable rate has to exceed 5% before you would need to change your payments at all.

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  4. Taking my advice I see… good for you. However, I don't think I said to put as much money as you can on the principal. In fact, I would consider doing the opposite. Is paying down the principal such a smart thing to do considering how low mortgage rates are right now? (Anyone care to weigh in?) I might put that money in equities — returns will be higher than a 2% or so variable rate that you're trying avoid. Grow that money and put it on the mortgage when rates rise. Of course, it's always great to have no mortgage, but for thejavascript:%20postComment(0); amount houses are going for these days, most people won't be able to pay off their house in a hurry.

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  5. I'll weigh in. Originally–prior to BoC announcements and Fed statements–I had suggested the security of a fixed. Rates are low–historically low–and a little peace of mind on a first purchase is always nice. But Jody is made of tougher stuff; he waited and it paid off. The 3-year variable is a good gamble. That said, I still advocate paying the fixed rate, despite the savings you'd get with a variable. Why? Because your mortgage is the single largest debt you will carry over your lifetime and you can save literally hundreds of thousands of dollars just by shaving 5 or 10 years years off the length of the mortgage. By taking advantage of mortgage terms–ie: annual prepayments and double-up payments–and you can quickly realize these savings. Plus, investments right now are NOT making a decent return. But 10 years from now (even 5 years from now) the markets will do better and money in those markets will get a better return. If you pay off your principal faster, then 5 or 10 years from now your mortgage dollar will go much, much further and you'll have more to invest in a portfolio. (And there are other benefits, but this is just a reply to a great column and great comments). My two cents.

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