Interest Rate Outlook - QUITE LOW FOR SOME TIME ??? Hence: Go Fixed or Variable ?

[Thomas Beyer]

Prime rate is currently 3% .. and expected to go up 1% by year end 2011 and a further 1% by year end 2012. But with oil over $100 (and possibly higher), turmoil in the middle east (and possibly Iran, China and South America soon), ongoing US municipal, federal and state debt issues, unresolved European debt issues, and a still lingering fear of unemployment in many Canadian provinces, notable our 2 largest provinces of Ontario and Quebec .. who knows for sure ? It might stay low for even longer than that !



The best variable mortgage rate is about prime-0.7% today, March 2010. When prime goes up it'll get better .. perhaps up to prime - 1.5% if prime goes up 2%!



If, as widely expected, prime goes up to 4% (from currently 3%) by year
end 2011 in four 1/4% increments it is fair to assume that prime - 1% or
even - 1.25% will be reached sometime in 2nd half of 2011.



Loads of cash sitting on banks (or corporations) balance sheets !! LOADS
!! And with Canada's long term deficits going lower I expect interest
rates to stay FAIRLY LOW for quite some time. 4.x% for 5 year rates fixed ..
and prime - 1.y% for variable !!



So what is better: Save for sure now .. and maybe pay a bit more tomorrow ? or pay more for sure for 2+ years and maybe save in 2.5 to 4 years ?



Hence, the cautious mind should lock in rates .. and the more
experienced type with some cash reserves stays variable.Prime -1.5%
in two years will still be well below the fixed rate of today's best rate of slightly
over 4% ! Prime will have to go over 5.5% for variable to be more expensive than today's best rate of 4% ! And that is likely 2 years out ..so prime has to go well over 6% for you to save money locking in today at 4% and pay more for sure for two years.







Your thoughts ?

 

[MarkHealy]

There is one other factor to consider in the VR vs Fixed. I agree with Thomas that you will save money with VR but as we are now seeing sometimes you have to get a new mortgage (ie Xceed, GMAC not renewing). This touches close to home for me as we just suffered a huge loss in a none real estate investment. This loss negatively effects the income/balance sheet. We are a family corporation and many of our mortgages are either in the corporations name and/or are commercial mortgages. So my current financial situation has a large impact when the mortgages gets renewed. The point to consider is although you have all the options open to you today, what will you do if your situation changes in the future? I'm not saying go one way or the other but I am a FIRM believer in plan 'B' or sometimes even plan 'D,E.or even Q'. Sometimes planning to get through your next 5 years with known expenses might be a better or more workable plan then saving on the interest. This assumes the property still cash flows and due diligence was done etc.

As they say chance favours the well prepared.

 

[RussellWestcott]

Great discussion, early next week I'll post an analysis of the numbers, to determine if you should lock-in or ride the variable. The stats say that 88% of time variable outperforms the fixed rates (if held for the term of the mortgage). But the question is; are we in the 12% of the time right now...



Here is a brief Mortgage update from Peter Kinch











Enjoy and stay tuned to the announcement early next week, including an audio interview with Peter Kinch, featuring his interest rate predictions

 

[RedlineBrett]

So Thomas would you favor 3 or 5 year commercial money right now? Rates on 5 year certainly work fine but 3 is better... we signed off on the LOI for our first commercial loan yesterday and took the 3... But there were other factors to our deal that clouded the picture rather than just our outlook on rates.



If you like 5 better would you ever consider 10? One of our options was a 1 year interest only with no prepayment penalty to stabilize the building but we declined due to lower LTV limits and fees again in 1 yr.

 

[Thomas Beyer]

[quote user=RedlineBrett]commercial money right now


We have 2 lareg mortgages at 10 years as we thought 4 and 6 years ago: rates would go up .. lock her in .. at 5.5% and 5.2% .. and rates have been lower ever since .. so NO .. not 10 years. [all others are 5 year mortgages, occasionally]



5 year money is quite cheap & plentiful again up to 75% LTV in commercial, 4.5% for best commercial rates to 6% depending on location, bank, mood of the banker, personal net worth, rental upside, property quality, etc. .. and 3 year money only 0.5% cheaper ..



I'd go 5 years and shop for a best rate .. or go 5 years Banker's Acceptance + offset .. if available .. unless the property for some reason allows significant rental upside, say in year 3 or earlier !



1 year makes sense only if you get significant rental upside in a year due to fees ..

 

[housingrental]

Generally variable makes a lot of sense....

Currently there is lots of good reasons to go fixed... even longer term fixed.... There are very reasonable scenario's that could play that will make someone taking a 5 or even 10 year fixed looked like good in the future.... Only time will tell....

 

[RedlineBrett]

Thanks Thomas.



We signed a LOI on Friday for 3 yr money at bond + 193 for a 3M first and 8% on a 600k second. We had a colliers appraisal significantly over our purchase price but the DCR #s held back what the vendor would lend to. So we did the 3 thinking when renewal comes our building will be humming along nicely and we can get rid of the expensive second. Lots of bickering with commercial brokers to get to this result. Very nearly went with a prime +2 variable on a 1 yr (I wanted to) but too many of our LPs think the blended rate we have now would still be better than rates 1 yr from now on a larger first.

 

[cindyding]

May I know which bank offer P-x% for LOC? The banks that I've been talking are giving P+1?



Thanks a lot.

 

[Thomas Beyer]

[quote user=cindyding]May I know which bank offer P-x% for LOC? The banks that I've been talking are giving P+1?


Scotiabank, for example: LOC at prime .. and mortgages at P-0.7% !! There are others, too !



Ask a mortgage broker.



LOC is usually NOT P-x% .. only mortgages !

 

[MonteDobson]

Just got an email today for a variable rate mortgage at prime -0.95% (with some restrictions of course). But goes to show you that the tides have changed and the variable rate spreads are very close to what they were 4-5 years ago when we got prime - 0.75-0.90% on all of our mortgages.

 

[RussellWestcott]

[quote user=RussellWestcott]Great discussion, early next week I'll post an analysis of the numbers, to determine if you should lock-in or ride the variable.




As promised, here is the link to the analysis of should you.



Stay tuned later today, I'll post the audio interview I just completed with Peter Kinch, where he looks into the crystal ball and gives you his interest rate predictions, plus his 4 'never miss' signals to watch for to predict interest rates for yourself.



Click here for the analysis

 

[RussellWestcott]

The Interview with Peter Kinch is now ready to go...



Enjoy



>> click here to listen