To lock or not

[kramster]

I've been trying to do some research on historic interest rates to assist in determining whether or not I should lock in to a 5 year rate.

What I'm wondering is if the current difference between the BOC bank rate and the banks' posted prime rate is typical. Currently I believe it's a 1.75% difference (0.5 vs 2.25 prime). source http://www.bankofcanada.ca/en/rates/interest-look.html (bank rate monthly)

Currently I can get prime -0.25%, for a closed variable rate of 2%. The best 5 year rate I can find is 3.99%. (I'm not with Sutton, so I can't get their rate)

If the spread is consistent, it would require the bank rate to be about 2.5% or more for the fixed rate to beat a variable. According to the chart I downloade on the BOC website, since December 2008 when the rate was dropped to 1.75%, there has never been a time in the last 10 years where the rate was better than 2.5%. I know you used to be able to get prime -1%, which would change things a little, but to get even prime -.25 requires a 3 year term.

The leads me to believe that the likelyhood of paying less than the current 5 year fixed rate if I choose the variable rate is slim to none averaged over the course of 5 years.

Am I making sound assumptions here? Does it make sense to other people that variable right now is a pretty high risk play with a slight chance of coming out ahead and pretty big chance of losing?

The idea of going variable and locking in later is there, but will you get a chance to do this before it rises? And to me this is a little like trying to pick a bottom of a stock price. When do you jump in? There's also the problem that the lender with best variable may not be the one with the best 5 year fixed, so if you want to change from variable to fixed you are already at a disadvantage.

[bestplaceonmeth]

I think the BOC has been very good at telegraphing their intentions to the general public very far ahead so that there are no surprises.

Even though they've hinted strongly that rates will be going up next year, I'm starting to wonder if that's actually going to happen because there is no inflation, no sign of inflation to come and nothing but deflation as far as I can see.

When you have a bank rate of near zero for an extended period of time, that means the economy is on life support and we are truly in deep shit. Unfortunately tens of thousands of people only saw the bottom line of their monthly payments and saw this as a great time to buy real estate. Bad move.

If deflation continues, this will be murder on those who paid a high price for a piece of junk.

As for you, I would stick with variable until it's absolutely clear the BOC will be raising rates - and believe me they will let you know, but to be safe keep an eye on the bond market where yields have been dropping like a rock. Another sign of big trouble.

Make no mistake though, extended emergency rates does not mean real estate price will continue to climb or even stay at current levels.

See Japan 1990 >>>

[MultipleOffer]

BoC overnight rate is currently at 0.25 (not 0.5).

[vreaa]

I've taken the liberty of archiving kramster's deliberations as representative of important current activity (lots of people are chewing over the same decisions).
“Does it make sense to other people that the variable rate right now is a pretty high risk play with a slight chance of coming out ahead and pretty big chance of losing?”

[BeatBox]

You can get variable at 2%
Fixed is 3.99%.

A difference of 1.99%

Why would you not go variable? The spread is almost 2% That would require the BOC raising rates significantly. Not likely to happen within the next year. A slight increase, maybe. Then you're paying maybe 2.5% and still significantly below fixed.

BTW: This doesn't grant you the ability to max out your borrowing based on 2%. Doing that would be foolish. Maybe max out borrowing at the 3.99% allowance and then go for the Variable. Apply the difference into your payments so that you are paying down your principle much quicker and when it comes time to renew you owe far less. I mean, the difference is about $100/month for every 100k borrowed. Over 12 months, that's about 1% more of the principle paid down every year.

That's what I would do.

[kramster]

BoC overnight rate is currently at 0.25 (not 0.5).

My description was incorrect so I changed the post to clarify. There are 2 rates available for download on the BOC website. One is the 'target for overnight rate' which is .25% and the other is the 'bank rate'. I was using the bank rate, not the target overnight rate.

[kramster]

I've taken the liberty of archiving kramster's deliberations as representative of important current activity (lots of people are chewing over the same decisions).
“Does it make sense to other people that the variable rate right now is a pretty high risk play with a slight chance of coming out ahead and pretty big chance of losing?”

I have edited my post to include the source and to clarify which rate I was referring to as I incorrectly described it. If you don't mind, would you please update your quote accordingly to reflect more accurate information.

Thanks

[vreaa]

kramster,
Sure, I have done so.
Thanks for letting me know.

(Also appended BeatBox's advice to your deliberations).