Fixed or variable? 4 reasons why you should go with variable for a condo investment
Your purchase offer has been accepted ? Great, now it’s time to get a financing and the most asked question is “should I go with fixed or variable rate ?” then “what if the variable rate goes up ?”.
As a condo buyer or investor, it is extremely crucial to do the numbers so here my 4 reasons why should you go with variable rate. At the end of this post you should not question yourself with this typical fixed or variable rate.
Variable rate mortgage historically save you money
Statistical studies demonstrated that variable mortgage rate can save you up to 90% of your money. I’m not inventing the numbers, just read this financial study made from the York University who looked at the rate between 1950 to 2007 who says that the average savings was around 20K for over 15 years per 100k borrowed.
Variable rate is cheaper to break
When you realize you can make more money by changing your mortgage and you need to use your equity for personal use or reinvest somewhere else, there are always penalties for breaking your mortgage earlier.
Penalties are mostly based on interests, often 3 months. Because your interests mortgage is always lower than a fixed rate since they build in the following way: prime rate minus X. The penalties will then be cheaper because the interests costs already less.
If you want to do the maths right now, you can use this calculator to estimate your penalties fees.
Financial system does not want tell you the truth
Because we possibly saw our parent having a fix rate and banking system saying fix rate is more secure, we are basically trained to think variable rate is risky.
It is true that if interest rate goes up or down, the mortgage rate will follow as simple. However, we should think this is normal as money is a commodity like a stock options or currency. It is then normal that your rate fluctuate everyday, actually not. Bank of Canada revised usually revised their rate every 3 months so variable is kind of natural rate.
Fixed rates are build or constructed by your bank whereas the variable rate follows the natural rate. Banks have very smart people who take advantage of this fix rate saying fix rate is more secure. Like a diet, we should go the most natural as possible with a natural rate (variable rate).
2 of my personal examples
On one of my Toronto investment, I originally got and kept a fixed rate of 2.94% for 2 years. I then switched for a variable giving me today 1.8% (prime minus 0.9) and it’s been more than year I enjoy paying more capital than interests on my mortgage. To lose money the prime rate of the bank of Canada should be over 3.84%.
Time the bank of Canada it would take 4 increases of 0.25% to get there and who knows how long it will take. While waiting for this rate to go up I would still enjoy to pay more capital than interest.
Same example with one of my condo in Montreal where I originally got a fixed 2.89 then immediately switched to variable rate giving me an actual 2% (prime minus 0.7). To lose money, the rates prime rate should go over 3.59%.