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Variable vs. Fixed Rate Mortgages: An email correspondence

Subject: So You’re an Economics Kinda guy…
Boba Fett <bfett@slave1.com> Sun, Sep 24, 2017 at 5:37 PM
To: Mr CIQY <me@caniquityet.com>

hey man,

Mrs. Fett and I were talking mortgage after the Bank of Canada raised rates, and realized we don’t really know squat.  and we thought, who does know squat? and the answer was: maybe Mr. CIQY?
As one of a very few economics minded friends, wondering if you had any thoughts regarding rate increases and fixed mortgages?
Mr. CIQY <me@caniquityet.com> Mon, Sep 25, 2017 at 7:37 AM
To: Boba Fett <bfett@slave1.com>

Oh I have thoughts on a lot of things. Doesn’t always mean they’re right though.

I guess it depends on a lot of factors. Are you asking because you guys currently have a variable rate and you’re debating whether/when to lock in to a fixed? If that’s the case, then it kind of depends on the spread. We’re in that situation now ourselves. Last time I checked, for us the spread was 0.55%. So in our example, that basically represents two more rate hikes, or close enough. meaning that in two more rate hikes, assuming our lender passes both those hikes along to us, we will be paying the same rate as if we locked in to the fixed rate now. There’s a school of thought that says you’re better off going with the variable because in the interim, you’re still paying less interest. Which makes sense to me. Of course, then it becomes a question of when the hypothetical third rate hike will be, at which point you’re worse off than if you acted today. But again, you will have paid less interest in the interim.

Some people really like certainty and knowing exactly how much they’ll be paying for X years and if that’s you, then going fixed might make sense. But in most cases you’ll end up paying more interest by going fixed.

What specifically were you guys wondering about or wanting to know?
 
Boba Fett <bfett@slave1.com> Mon, Sep 25, 2017 at 8:48 AM
To: Mr. CIQY <me@caniquityet.com>

Brother, you nailed it in one.

Effectively, we’re going through the variable–>fixed should-we? talk based on essentially the numbers you’ve got there; around a .5% difference.  So, as you say, we’re looking at a likely 2-hike equivalence in the rates.
Mrs. Fett’s read that the rates could go up as much at 1%, in which case, locking in a fixed rate now would make sense.  But she’s also read that a hike like that would put a bunch of people out of their homes because people think a mortgage is a free house from the bank.
Based on your reply, can i assume you guys will remain variable?  We’re trending in thinking that way, but hoping we won’t regret it if the rate keeps climbing.
sigh.  I remember when finance talks were “should i get that comic book, or the creamsicle”.  Thanks for the thoughts (right or wrong) – it’s good to hear.
 
Mr. CIQY <me@caniquityet.com> Mon, Sep 25, 2017 at 9:14 AM
To: Boba Fett <bfett@slave1.com>
Well for us, we’ve got 3 more years left before we get to renew our mortgage. Our strategy has been and continues to be a) make minimum payments; b) save as much as we can and invest in TFSAs, hoping to earn some nice returns; c) on the eve of mortgage renewal, make a lump sum payment from our savings and investment income to the mortgage principal to try and get our monthly minimums lower for years 6-10. Trying to predict what will happen to the economy is a mugs game and if I knew how to do it properly… well let’s just say I don’t.

That said, there are reasons to believe that interest rates might not continue to climb uninterrupted over the next few years. For starters, inflation just isn’t that high yet, which suggests maybe more rate hikes might not be a sure thing. Secondly, all it takes is for another recession to hit and then we’re definitely not likely to see rates climb higher. And recessions tend to happen every so often for all sorts of reasons. It’s possible we’re about due for one soon. Looking for reasons why? I dunno… an end to NAFTA? Other major catastrophe? Start of a new war? Another big drop in oil prices? A strong Canadian dollar that crowds out manufacturing exports? A major housing collapse due to rising interest rates (irony!)?

Or who knows? Maybe we’re at the start of a historic economic boom? I’ve been wrong about lots of things before. Anyway, we’re going to stay variable for now I think. But check back with me in a year when I’m paying 5% on my mortgage and kicking myself for not locking in.

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Boba Fett <bfett@slave1.com> Mon, Sep 25, 2017 at 10:42 AM
To: Mr. CIQY <me@caniquityet.com>

Thanks for the sanity check – i think we’re largely in the same boat, but your one-time lump sum payment makes way more sense.  We have the opportunity to pay down the principal via acceleration, but it would make more sense to invest those payments and then use the resulting interest as well.  See, you’re the economic guy for sure.  Also, thanks for the context – it’s easy to freak the f out when you hear “rate increase” but what you say also makes sense.  and some of that context is TERRIFYING.

Thanks again homes!
 
Mr. CIQY <me@caniquityet.com> Wed, Sep 27, 2017 at 10:55 AM
To: Boba Fett <bfett@slave1.com>

Hey, so uh, I started a blog a little while ago, and it’s about personal finance, frugality, etc.

I was wondering if you would mind if I mined this email thread and made a blog post out of it? I would be obfuscating your identity as well, but I kinda thought an email exchange about fixed vs variable mortgages might be a semi-interesting way to address a topic that fits within my blog’s subject matter.

Would you mind if I published this exchange, lightly edited with all identifying information scrubbed? I’ll even let you pick your alias, if that appeals to you. 😉

 
Boba Fett <bfett@slave1.com> Thu, Sep 28, 2017 at 8:01 AM
To: Mr. CIQY <me@caniquityet.com>
Yeah, absolutely, go nuts!
As for aliases, is in like the Dear Abby write-ins?  “Worried in Weston” or “Scared in Scarborough”?  or just a name? In which case, can i get ‘Boba Fett’?
 
Mr. CIQY <me@caniquityet.com> Thu, Sep 28, 2017 at 8:14 AM
To: Boba Fett <bfett@slave1.com>
You can get whatever you want. Boba Fett is a good choice.

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