Is it time to go variable?

“Hi Mike.  My name is Cyrus.  I’m a real estate investor, and I recently purchased a new rental property.  I’m trying to decide if I should go with a fixed or variable rate.  What are your thoughts?”

“HI Cyrus.  That’s a great question.  There are many different factors that go into making this decision (how long you intend to keep the property for, can you refinance to take advantage of forced equity, ect).  Here, I want to focus on answering one question; With current rates, how many times would the prime rate have to drop before you’d save money on a fixed rate vs. a variable rate?

Mortgage Rates Courtesy of TD Canada Trust

5 year fixed rate for rentals 5.09%

TD prime rate of 6.7%

Discount to prime of -.2%

TD variable rental rate of 6.5%

Historically, variable rates are typically lower than fixed rates.  We’re in an odd rate environment right now where the variable rates are higher.  The Bank of Canada has stated they are not expecting to lower rates any time soon.  Let’s assume the following:

In eight months, the Bank of Canada lowers rates, at .25% increments, four months in a row.

In the last quarter of the year after, the Bank of Canada lowers rates by .25% increments.

In the next two years, there are total prime rate drops of 2%.

In this scenario, that is the breakeven point.  You would need to see eight rate drops in the next two years before you’d start saving money on a variable rate mortgage. 

Predicting the future is difficult at the best of times.  In our current chaotic economy, it more difficult than ever.  Whether you go with fixed or variable, there are always risks.  Make sure you take the risk that you are most comfortable with. 

-Mike Schroeder, Mortgage Architects