will interest skyrocket? advice please!

[Dandelionkid]

Hi,
I am paying prime-.75 right now. That means currently paying 1.5% on my mortgage. I can lock in at any time without penalty. The bank is currently offering 5.25% for the next 10 yrs- basically the life of our mortgage. Would you lock in now or wait?
Thanks in advance!!

[just_lily]

Don't you just wish you had a crystal ball??

I think interest rates will come back up, but I don't think they are going to sky rocket. I don't think we will ever see the 14% mortgage rates that were common in the 80s again.

So in order to break even, prime will have to rise to over 6.00%. Here is a listing of the prime rate over the last 10 years. The highest it has been in 10 years is 7.5%, and that was during the tech boom in 2000.

Personally, I would take advantage of the ridiculously low rate you have now and pay off as much principal as you can. Increasing the rate now to 5.25% will add thousands and thousands of dollars of interest you will have to pay. Keeping the floating rate may allow you to pay off the mortgage before the 10 years you have planned.

The Bank of Canada has also committed that they won't increase rates until next year .... so there is no rush. You can always wait it out for a while and re-evaluate later. Even if you end up locking in slightly higher than 5.25% I think you will save money overall by sticking with the 1.5% now.

Man... do I ever wish we had that rate. You are making me jealous!!!

[syd'smom]

wow - thanks for the info. Our rate isn't that low - but it is good. We'll keep floating for a while.

[wifeandmom]

Instead of looking at it in terms of what interest rates *might* go to at some point in the next 10 years, I'd look at what YOUR current interest rate *could* go up to. Is there a cap on how high your rate could ever go over the life of the loan, or is it strictly prime minus 0.75% no matter how high prime might be?

Assuming there IS a cap on how high it could be, that's the rate you need to look at. Let's say the very most you could ever pay no matter what prime went to was 12% (just making up some numbers here). What does that do to your payment? Could you afford it?

If you look at your maximum interest rate and could afford it, I'd likely stick with what you've got. That's saying a lot coming from me, the one who absolutely detests ARM's and thinks they should be outlawed altogether. One huge factor in me saying this is the fact that you have 10 years or less left on your mortgage, so you should at least in theory have equity that could make refinancing easier if it absolutely came down to it.

Now, if you look at the maximum interest rate and think "Holy crap! There's NO WAY!", you need to get a fixed rate ASAP. If there *is* no limit to what your interest rate could go to, you need to get a fixed rate ASAP. Basically, if you can't afford the worst case interest rate, I'd get out. Like yesterday. You have absolutely no control over what prime rates are, and while we can all make educated guesses, that's all they are. Guesses. And the roof over my head needs to be a bit safer than a guess, kwim?

One of the biggest problems with an ARM is the assumption that "I'll just refinance" before the rates go up. Well, what happens when the banks aren't lending or you can't refinance for whatever reason? I can't imagine EVER going into a mortgage with the thought of "I'll just refinance at a fixed rate", assuming that everything is going to line up perfectly and it'll all work out as planned.

[CarrieMF]

If the rates won't be raised until next year I'd wait until Nov to decide.

If you have 10 years left, I wouldn't lock it in for 10 years. I'd lock it in for 5(IF the rates look like they're going up alot) & pay it off earlier.

[just_lily]

Originally Posted by wifeandmom

One of the biggest problems with an ARM is the assumption that "I'll just refinance" before the rates go up. Well, what happens when the banks aren't lending or you can't refinance for whatever reason? I can't imagine EVER going into a mortgage with the thought of "I'll just refinance at a fixed rate", assuming that everything is going to line up perfectly and it'll all work out as planned.

Are you in the US? The OP is Canadian, and the type of rate she has is a little different. In order to lock in a fixed rate she doesn't have to do a whole re-fi, she just calls up the bank and says "I would like to lock in for X years" and the bank says "Ok." No credit applications, no headaches.

I know what you mean though, and I totally agree that the issues with floating rates in sub-prime mortgages is almost criminal. But Canadian mortgages, and the Canadian banking system as a whole, is a different animal.

[CarrieMF]

Originally Posted by just_lily

Are you in the US? The OP is Canadian, and the type of rate she has is a little different. In order to lock in a fixed rate she doesn't have to do a whole re-fi, she just calls up the bank and says "I would like to lock in for X years" and the bank says "Ok." No credit applications, no headaches.

I know what you mean though, and I totally agree that the issues with floating rates in sub-prime mortgages is almost criminal. But Canadian mortgages, and the Canadian banking system as a whole, is a different animal.

yup our banking system is completely different.

The only do credit applications, fees, etc with a refinance IF you are increasing your mortgage.

when we still had our mortgage we didn't have to go into the bank if we didn't want it, it would have just rolled over.

[Kyamo]

Originally Posted by CarrieMF

yup our banking system is completely different.

The only do credit applications, fees, etc with a refinance IF you are increasing your mortgage.

There are fees if you are already locked in to a closed mortgage and you decide to break it.

[wifeandmom]

Originally Posted by just_lily

Are you in the US? The OP is Canadian, and the type of rate she has is a little different. In order to lock in a fixed rate she doesn't have to do a whole re-fi, she just calls up the bank and says "I would like to lock in for X years" and the bank says "Ok." No credit applications, no headaches.

I know what you mean though, and I totally agree that the issues with floating rates in sub-prime mortgages is almost criminal. But Canadian mortgages, and the Canadian banking system as a whole, is a different animal.

Ah, I see.

So can she not call them up now, with her interest rate at 1.5% and say she wants to lock in for 10 years at that rate?

No...wait...she said if she locks now, it's at something like 5-6%.

I think I get it now. If she waits til her rate rises to say, 3%, the "lock in" rate might be 6-7%. Is that how it works?

Is there a limit to what her rate can increase to or is it always tied to prime rate no matter how high prime rate goes? That's likely what I'd base my decision on. If there's a limit to how high it can go, I'd look at worst case possibilities and go from there. If there's not a limit, I'd likely lock now.

It would freak me the hell out to not have a cap on what my interest rate could go to, but then again, adjustable rates freak me out in general. At 1.5%, there's really no where for it to go but UP, kwim?

[wifeandmom]

And, FWIW, we just closed on a re-finance for our house at 4.5%. We locked in at 4.5% almost exactly 2 months ago, around mid-April. Since then, the lowest rate offered now stands at about 5.25%, so they're already going up again.

We got lucky and picked 4.5% as our "lock it now" rate, knowing we'd kick ourselves if they continued going down after we locked, and we'd kick ourselves even harder if we waited for 4.5% that never came and rates just went back up again. They sat right at 4.675% for almost two weeks before finally dropping to 4.5% (where they stayed for only two days...we really did get lucky).

Anyhow, point is, rates are already headed back up again from what we're seeing. Of course, they might go back down. Who knows. But really, 4-5% for a mortgage is a really good deal.

[just_lily]

I don't think there is any doubt that interest rates are going to go up, the question is really whether they will increase high enough and fast enough for the OP to lock in her rate now, or if it would be better to stick with the low floating rate for the time being. My personal opinion is to stick with the low floating for the time being, and re-evaluate when market conditions start to change.

But you definitely have to do what you feel comfortable with. I agree that 5.25% is great too - I think we are paying 5.8% on a five year fixed we took out nearly two years ago. But 1.5% is better.

There probably is a cap on the interest rate, but it will be written in the actual mortgage documents, not the loan forms. It is usually something like 15%.

[Dandelionkid]

Thanks so much for the replies. I kinda thought I had only planned to ask this and never did- I'm glad I doublechecked!! I am tempted to wait until they go up.
Just_lily:

I think interest rates will come back up, but I don't think they are going to sky rocket. I don't think we will ever see the 14% mortgage rates that were common in the 80s again.

So in order to break even, prime will have to rise to over 6.00%. Here is a listing of the prime rate over the last 10 years. The highest it has been in 10 years is 7.5%, and that was during the tech boom in 2000.

Personally, I would take advantage of the ridiculously low rate you have now and pay off as much principal as you can. Increasing the rate now to 5.25% will add thousands and thousands of dollars of interest you will have to pay. Keeping the floating rate may allow you to pay off the mortgage before the 10 years you have planned.

The Bank of Canada has also committed that they won't increase rates until next year .... so there is no rush. You can always wait it out for a while and re-evaluate later. Even if you end up locking in slightly higher than 5.25% I think you will save money overall by sticking with the 1.5% now.

Man... do I ever wish we had that rate. You are making me jealous!!!

Would it make more sense to put our line of credit on hold and pay on mortgage while the interest rate is so low? We are paying about 4% on our 8000 line of credit. Should I just pay min on this and put the other 800 on our mortgage monthly?
Thanks!!

[just_lily]

Conventional wisdom would be no, you should pay off the loan with the highest rate first, which would be the line of credit.

But because the 1.5% isn't fixed and we know it is going to go up, there may be a scenario that would lead to you wanting to put your extra cash on the mortgage. But it would all depend on how high and how fast you think the interest rate on the mortgage is going to go. It may be interesting to run the numbers.

If your monthly payments haven't changed on the mortgage even though your rate has gone down you are automatically putting more against the principal each month. The easy answer is that I would probably stick with that, and put everything extra on the LOC to get it paid off. And then put all of THAT money against the mortgage.

[wifeandmom]

Originally Posted by Dandelionkid

Would it make more sense to put our line of credit on hold and pay on mortgage while the interest rate is so low? We are paying about 4% on our 8000 line of credit. Should I just pay min on this and put the other 800 on our mortgage monthly?
Thanks!!

IF you have 6-12 months worth of emergency fund, I'd put the extra money towards the line of credit. If you don't have a full emergency fund, I wouldn't pay anything extra to anyone, no matter what the interest rate is, until I had an emergency fund in place.

Then, I'd put it towards the LOC for two reasons. One is the higher interest rate. Two is (I'm assuming) the LOC balance is lower than your mortgage. At $800 extra per month, you should have an $8K LOC paid off in well under a year.

[Dandelionkid]

Thanks you guys. I'm meeting with banker tomorrow and I will ask him to run the numbers- LOC vs mortgage payments. Hmm... sick feeling to do this but maybe even better to put the LOC on our mortgage and keep paying the extra into it this next year...I just hate seeing the numbers go up on our mortgage. Its strange that I started at 119k/25 amortization 7 yrs ago and now only at 108k now (put student loan on it a few years ago) and now 11 yrs amortization. So strange- I don't understand the whole interest first/principal later thing.
Any more thoughts Im listening

[lalalola]

I could have wrote out this topic myself.....except we are paying prime - 0.8% . We have been talking about locking in for a while but I just can't go from paying next to nothing on interest to 5% or so! We are almost 3 years into a 5 year floating mortgage. I think when the economy is on the rebound we will break our mortgage and lock in for 10yrs or 5 yrs or whatever sounds best at the time.

Friends of ours who were in a closed mortgage, broke their contract (paid the $7K fine), took out their "equity" (almost 3 years worth) and locked in at 4.something% and were basically calling us crazy for not doing the same. And I look at them as crazy......

When we were buying RRSP's our banker had to print out our statements twice cuz she thought there had been a mistake, as our interest rate was so low! Gotta love it!!!

[StarJune]

I would absolutely NOT lock in with the rates that you have. These are historic lows that we may never again see in our lifetime. The variable rate is linked to the rates set by the Bank of Canada. They have said that they do not plan to increase them till early next year. So I would hang on to your rates and work on paying down as much principal as you can to maximize your low interest rate. If I were you, I would pay your mortgage as if I had a 5-yr fixed and you will be saving thousands in interest.

Fixed rates are tied to the bond market which is changing and influences the increases that we are seeing in those rates. You will still be saving in the long run even when you lock in later at a higher rate. Let your mortagage broker or banker do the calculations for you.

Personally, I would feel better psychologically being mortgage-free and having a bit of that line of credit.... so pay your mortgage down as much as possible and then imagine the kind of money you can pay the LOC off with to eliminate it. I know that it makes sense to pay off the higher interest first, and I would still continue to agressively pay it down but would be more focused on the mortgage because we just will not see deals like this again anytime soon!

[sanguine_speed]

Originally Posted by wifeandmom

Ah, I see.

So can she not call them up now, with her interest rate at 1.5% and say she wants to lock in for 10 years at that rate?

No...wait...she said if she locks now, it's at something like 5-6%.

I think I get it now. If she waits til her rate rises to say, 3%, the "lock in" rate might be 6-7%. Is that how it works?

?

She would have to lock in at the current fixed rate...it varies from banks to bank and by lenght of term. So, if you take a 'variable rate' mortgage, it fluctates. If you have it in your contract that you can lock into a 'fixed rate' at any time, then at any time you can lock into what teh bank is offering for fixed rate mortgages. Right now that's about 4.25% for a 5-year term (not amortization!) or 5.5% for a 10-year term (not amortization). It does not mean you can lock in the interest rate you are paying by virtue of the "prime minus" or "prime plus" calculation. Mortgages are very different here.


OP, I would hang on to that. None of us will likely see anything like it for a long time.

We're thrilled that we've just secured a 5-year term for 3.65% fixed, as fixed rates just jumped! This may be the best rate we get for a long time.

Also, it's impossible to get prime minus mortgages right now. Be : that you got one at a great time, and stick it out. I think overall you'll come out ahead. But, as we all know, it's impossible to know, lol.

[StarJune]

Bank of Canada just announced that the recession is over . Rates will start creeping up now for variable. Hopefully they will keep the promise of no changes till early next year.

Now would be a good time to get a pre-approval/commitment so that you can lock in a rate for the next couple months... just an idea.

[StarJune]

I meant to add - not totally locking in, but most mortgage companies will guarantee the rate for a period of time. It may be worthwhile to have this pre-approval as a back-up and if needed they will honour that rate and not the increased one.