Renewing a Mortgage – what would you do?

Sorry it’s been quiet here last week. It’s been one of those weeks.

I’ve been toying with an upcoming mortgage renewal, and I think I’ve finally made a decision about what I’m going to do.

Anybody who has a mortgage or who wants one knows that mortgage rates are at an all time low right now. In Canada, the Bank of Canada chief announced last year that he’d hold the line on the rock bottom interest rate until June of 2010. My mortgage is up for renewal in July.

Currently, I’m at a variable rate of 1.4%. I’ll never see that again, and I’ve totally accepted that. When I took this mortgage out, the way they calculated the variable rate was different than how they do it now.  If I renewed with my current lender today, the variable rate would be 1.8%. Still not too shabby.

The fixed rate for 5 years is 3.89%.  Naturally I’ve consulted with a few friends.

As you might imagine, the risk averse are seeing the warning signs of increased interest rates in the near future and have advised me to lock in at 5 year fixed. The 5 year rate is a great rate, there’s no question.

A few other friends, the minority, the ones who tend to take a few more chances are advising me to stick with variable. This is where my gut tells me too. I’ve usually gone with a variable mortgage. Many studies have shown that over time, a variable will outperform a fixed rate mortgage most of the time.

Here’s my assumptions:

  • The Bank of Canada chief will increase the interest rate in June
  • That increase will be modest, like one quarter of one percent
  • The interest rate will continue to climb, slowly and cautiously to balance the growth in the dollar

Even if I renew and the variable is 1.8 or 2.05%, will that rate more than double in five years? If so, how long will it take to double? Will it take two years?

However long it takes to double, that’s the amount of time where I’d have the edge on having a variable, and be able to put more money toward the principle and less toward interest. If I pay less than, let’s say 4% for two of those five years, then I’ve made the right bet.  Hell, if I pay less than 4% for one year, I’ve still won – presuming that the rate doesn’t scream along to 6 or 8% in that five years.

The Bank of Canada Governor also knows that many people would be in a very bad way if the interest rate doubles too quickly. Only now is the Bank introducing new lending rules where new borrowers have to qualify for the fixed rate mortgage over five years, regardless of the produce they take out, to boost the odds folks can hold on to their homes when the rate goes up.

I’ll always have the option to lock in my rate, but obviously if I’d be tempted to do that, it’d be at a higher rate.

So, my thinking right now is to stick it out and ride the variable train.

What would you do?

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