Fixed or variable?
We’re coming up to mortgage renewal this year, and that made me think about whether to go fixed or variable this time around. We currently have a fixed loan at 2.79%, and with where rates are going, we’ll be lucky to renew it at 3.25%. So does it make sense to drop down to a variable? Let’s take a look.
We’ve had a broad trend of falling interest rates for nearly the last 4 decades in Canada. 
Even without considering that variable rates are lower than fixed rates, it should be obvious that locking for 5 years at a time has been a losing proposition in almost every case in that period. You are always paying yesterday’s rate, and yesterday’s rate was almost always higher than today’s. Of course Canadian borrowers haven’t understood that reality, with the majority going for fixed rates.
The average 5 year lending rate bottomed in June of last year and has risen about half a percent since then, with more increases predicted. That means we are either in for a temporary rate bump (like we had in 2007, 1999, 1994, and 1989) or we have hit the end of this trend and are starting a multi-decade upswing in rates. What will it be? Well after three bumps to the overnight rate, Poloz is already talking up some doubt about further rate increases, but of course the Bank of Canada are merely followers of the economy and inflation so realistically he has little sway over this rate.
The big question is then, in an environment where rates are not falling, is it still better to go variable over fixed?
The target overnight rate is reviewed eight times per year, and if we look at the past couple decades of movement there, if it’s going to get changed it tends to get nudged by 0.25% at a time (very occasionally by 0.5%). In the past two cycles, rates increased at a rate of about 1% a year once the Bank of Canada decided that they needed to put the brakes on inflation.
Bank Rate is 0.25% above the target overnight rate
If we were to add 2% to the overnight rate similar to what happened a decade ago, then we would probably end up with the best 5 year fixed rates at 5% in 2019 (and being stress tested at 7%!). That is pretty unlikely though because the impact of interest rates is relative, not absolute. In 2005 the central bankers had to raise rates by 2% to keep the economy from boiling over. In 1997 it took 3% to do the same. In 1994 it was 4% and in 1988 it took 5%. As rates fell, debt levels increased and smaller rate increases had larger cooling effects. This time around we are 0.75% into the rate increase cycle and we will likely top out well below a 2% total increase.
According to RateHub, the best 5 year fixed rates are about 3% while the best 5 year variables are 2.25%. If you were to take on a 5 year mortgage right now, what would happen under various rate scenarios? Below are the interest rates and payments on a $500,000 mortgage for taking a fixed mortgage, or a variable one if rates don’t budge, increase another 1% from here at a moderate pace, or increase faster and higher (click to enlarge).
Of course if rates flatline from here on out, the variable will be better, and if rates rise aggressively, the fixed will be better. However given our history, it would be extremely unlikely for rates to rise as fast and as high as the aggressive scenario. Even if they spiked that high it would likely immediately collapse our debt-driven economy and rates would fall again. Even under the moderate scenario – although you would be paying more than fixed rates for most of the term – your total interest cost is actually the same as on a fixed rate since you are paying a lower rate at the beginning when your principal is highest.
On a $500,000 mortgage
Personally I think that the most likely scenario for rates falls somewhere under the moderate increase scenario. That will put our total increase for this tightening cycle at 1.5% or less which fits the pattern of decreasing rate increases we’ve seen for the past few decades. It also means that a variable rate will almost certainly still be the better way to go, and unless something big changes, that’s what we’ll be going for come renewal later this year.
Yes, interest rates could jump and we could end up paying a lot more per month. However if you think about it, there is no such thing as protection from that scenario in the Canadian mortgage market. Unlike the US, we can’t lock in rates for the duration of the mortgage (why?) so while someone on a variable mortgage may face a significant hike in payments over time, someone on a 5 year fixed will face the same jump at renewal time. If you can’t afford the extra hundreds a month now, the mortgage is probably too big and kicking the can 5 years down the line isn’t a solution to that problem.
Rates are not the whole story, there are also other differences between fixed and variable loans, most notably generally lower penalties to break the variables ones.
What do you think? Does the environment of no longer falling rates change the equation and will make fixed the way to go in the future? If you’re buying or renewing, are you thinking of going variable or fixed?
Monday numbers https://househuntvictoria.ca/2018/01/29/jan-29-market-update/
Ash
the point of buying international stock often wouldn’t be because you think it is going to outperform your home market but to provide portfolio diversification. International markets are at least somewhat uncorrelated with US and Canadian markets. Diversifying across markets can get you the same return with less risk.
That’s the theory. In practice global equity markets are more correlated than ever unless you seek out the obscure (Venezuelan ETF anyone?) so the benefit of international diversification is less than it used to be.
Of course in Canada you have to diversify at least to the US to get a balanced portfolio. Canada’s market is a bet on a handful of financials plus the energy sector.
Number 6:
Thanks for the video; reminds me of both LA and a more innocent time in some ways.
My painter says that he is thinking of moving and working in Sooke. In a lot of ways it makes sense.
Inflation’s return could shock a generation that’s never seen it
In the world’s rich countries inflation has been almost non-existent, meaning its sudden arrival could come as a shock. Beneath the headline figures lurk signs inflation is brewing in Canada, part of a trend that is emerging around the world.
While economists fear deflation, from the point of view of financial markets, new signs of inflation are worrying because they push interest rates higher, cutting the value of existing bonds. While Canadians saddled by rising debt payments may disagree, many economists will tell you that inflation is not a bad thing.
Anything below three or four per cent inflation can remain stable and actually be healthy for an economy, said Petersen an assistant professor at Simon Fraser University. But a sudden change in inflation could affect people who have never experienced it before.
“We’ve had a generation of young people who have seen hardly any inflation…” Petersen said. “If, for example, were were to get a big spike in inflation, we might expect that young people would overreact.”
http://www.cbc.ca/news/business/inflation-canada-1.4505207
As we all sit waiting for the Monday numbers I want to thank Leo for all the hard work.
Not exactly a flood of inventory in the core.
Check those below grade basements and make sure those sump pumps are working and the eaves are cleaned out. Check the city drains to make sure they are clear of debris. Expect long delays to and from work as the bike riders switch to cars and buses. Have good tires on your vehicle. And watch for pedestrians dressed in dark colors wearing hoodies and texting on their phones and senior’s scooters at full throttle crossing the road.
https://youtu.be/Gmq4WIjQxp0
Haha thanks Leo, good therapy for those like me trying to talk themselves out of market timing.
@Vicinvestor I am 1/3 international so yes I take some comfort there. Interestingly MMM argues against international diversification (from 2011):
https://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/
Thought this comment on reddit was enlightening as to people getting worried about the top of the stock market from Dow 9000 to 26,000. At some point they will be right, but the argument when they are won’t be any different than when they weren’t.
https://np.reddit.com/r/financialindependence/comments/7ti7zl/anyone_out_there_have_any_concerns_about_the/dtcwpgc/?context=3
There’s been an article everyday on CNBC and globe and mail saying the party’s about to end. This has been going for a year. The yield curve flattening is worrisome as inversion has predicted every recession since the 70s. It’s not inverted yet.
You have to balance FOMO with comfort losing gains to date. It’s difficult.
@Ash: what about international markets via ETF’s? Their valuations look much better.
https://www.theglobeandmail.com/globe-investor/inside-the-market/there-is-no-better-time-to-book-some-profits-than-right-now/article37743359/
Rosenberg is saying the stock market looks to be at the tail end of its cycle thus an ideal time to be rebalancing into safer investments (presumably fixed income rather than equities). Anyone else doing this or considering it? It’s of course market timing which goes against my strategy but have to say I find it tempting.
Alternative would be to stop buying stocks and just pay the mortgage until stocks look cheaper again.
Good food for thought, Ash. Thanks.
Until my mortgage is paid off, I’m hoping for low inflation and a terrible economy!
Speaking of potholes and other municipal issues, Saanich has made it very simple to report a problem:
http://www.saanich.ca/EN/main/community/report-a-problem.html
Pick from the drop-down menu, insert your contact info, and—voila!—an e-mail gets fired off to the appropriate Saanich division.
I’ve used it to report potholes, and dumped couches and mattresses. Easy peasy.
I was a big fan of the variable over the last ~5 years but the rate hikes started to take the fun out it. Had a variable at 2.05 and then the two hikes brought it to 2.55. At that point I converted to 2.89 fixed. With the latest hike I would have been paying 2.80 on a variable with possibly more increases to come, so no regrets so far. Really depends on the variable you can get at the time of renewal.
I’ve hardly thought about rates since I converted last year, so there’s peace of mind to consider as well. Leo and Marko have both pointed out that 5-years doesn’t give you much security, but I think it can in some cases. A lot can happen in 5 years for a young family- kids grow out of daycare, pay increases/ promotions accumulate, and the mortgage drops 20%.
They can fix potholes year round. They fill the hole with asphalt, heat it with some sort of blow torch, then smooth it over. I saw Saanich workers do it once. Didn’t take them long.
I just the open house on St. George with the new listing. I was actually favourably impressed by the house. They made very good use of the space. The stairs to the upper floor bedroom need to be redone but otherwise a very comfortable little house. At 1.5 mil I suspect it will sell fairly quickly. It will be interesting to see. There also seemed to be a number of buyers looking at the house (Couples dragging kids).
Try driving Landsdowne between Cadboro Bay Road and Beach Drive. It reminds me of East Berlin in the 80’s. It must be quite the kick to drive home to your Uplands mansion having paid $15,000 in property taxes yet beating your S500 to death on roads which replicate those of the worker’s paradise.
I believe that there’s a covenant on title that stipulates all the rules. Pretty sure they’ll be able to prevent rentals or overseas buyers who would leave units vacant. But flipping in two years won’t be stopped but it’s not as if some Uber wealthy conglomerate will swoop in and scoop up all the units…
Potholes are everywhere given it’s winter and we have the relatively poor Canadian asphalt standards to contend with (ever notice potholes are much less prevalent in Europe?).
I don’t think they can repair them either until the weather gets better.
Has anyone noticed how city of Victoria roads are in worse shape than surrounding muni’s? I think Helps is anti road/car. When the bike lanes went in on Fort they didn’t even bother repaving and like many City of Victoria Roads it’s in terrible shape…
That might be a tricky thing for an accredited appraiser to comply with as it is a projected future value upon completion of the project. The developer would be bending the arm on that appraiser.
But notice that the developer did not say that YOU get to choose the third party appraiser. Nor does it say the appraiser would be an accredited member of a recognized appraisal organization.
Unlike the word Architect or Realtor, the word appraiser or real estate appraiser is not copyrighted. Note there should be that trademark symbol after Realtor but I don’t know how to put it in.
If I was buying in the development – I’d call the developer on this one and have my own independent accredited appraiser value the property to establish the market value and then pay 8% less.
In reality I wouldn’t buy in the project simply because this add is meant to mislead and comes across as smarmy. Why would I buy in a complex where I already have developed a mistrust.
I wonder if they are going to be doing a bed check to make sure you are living there? Does anyone know if there a limited number of these discounted units in the building or whether it is all the units?
I presume the city approved higher density for the building in order to get these affordable units. Why does this have a bad odor like a dead skunk?
If you are driving on Fernwood just before Bay look out for the pothole that just shredded my tire.
Right, but the tone of the ad was very focused on how it’s cheaper now and can be sold later. Just struck me as a very weird thing to emphasize for an affordable unit that should be to live in not flip in 2 years.
People have to live in the condo’s for two years min. and can’t rent them out… is that speculation? Maybe more of a long term play I guess…
http://www.timescolonist.com/business/downtown-condos-to-sell-below-market-rates-to-qualified-buyers-1.23051102
Updated Overview of Total Household Credit
The table below provides an overview of changes in household credit over the past 12 months. The total dollar amount outstanding is noted, and broken down into components, as is the percentage distribution. The 12-month changes are given in dollar terms (again, broken down by component), and as a percentage of the total amount outstanding. Annualized 3-month and 1-month changes are also provided to give a sense of recent trends in household credit.
https://credit.bankofcanada.ca/householdcredit
Heard an ad for the Vivid downtown. Went roughly like this:
“Hey i just bought a condo for $50,000 below market value! There’s gotta be a catch right? No if you make less than $150,000 you qualify and when you sell there’s no restrictions! It’s like putting $50,000 in your pocket”
I wonder if the city appreciates their attempt at a more affordable condo being marketed to speculators
If you can handle the dead centre of downtown, 10 Acres, across from the Union Club, is highly recommended.
Sunday brunch at the fireside grill was good. On par with the oak bay marina brunch
I like having others pitch in to pay off my mortgage. We all work as a team!
I must be slipping or at least mellowing out since I used to be the most arrogant poster. It is not that hard to get up to 1600 a square foot with a very high quality build. If you built anywhere close to the standards of Craigdarrock it would easily get you over 13 million today.
Speaking of restaurants, love to get some recommendations.
Actually pretty close. Gold faucets, basins and Swarovski chandliers. Imported stone floors through out, and hand crafted mill work in the full sized second floor library. There is also a massive wine room and a theater for 30 or so. And not to mention the panoramic water views of Saanich Inlet from every room. All the bathrooms had TV’s. Finishing was in the Louis Quinze style with lots of marble statues both inside and outside the 10,000 square foot home. The central Italian marble fountain in the driveway cost $150,000 itself.
Makes your Gordon Head cabin where you have to let out half the house to strangers to pay your mortgage look pretty bad – doesn’t it!
Then on to Clives downtown for a Sazerac, some laughs and a Gimlet.
Is there any place in town that serves great Cioppino. I have a craving for it along with a gallon of Valpolicella. I had dinner at San Remos yesterday and while the meal was fine, I wished that I was at one of my favorite restaurants in East Vancouver. Vancouver was a nicer town when it was run by the Italian gangs rather than the Chinese gangs. You could always get great food.
For the build itself to cost $13M, as Just Jack claims, it seems to me that all the doors would have to be made of pure gold or something. But I could be wrong.
I have to agree with Leo: Marko’s success probably has a lot more to do with his work ethic (and choice of profession) than his “common sense.”
I think those are non-owner-occupied rentals, aren’t they?
No, we’ll be one of the last, like Fairfield and Oak Bay. Sorry, old chap.
Seems like a good hobby to me.
Dine around town on right now. I can recommend Glo. Good steak
Here it is Saturday night and I am just sitting at home with the wife watching Narcos. I think I need a new hobby.
“Disregard all that other stuff Hawk said was inevitable but wasn’t.”
The most arrogant poster here lives in a hood where 1 in 5 homes are ghost houses with no one living in them according to the latest census. Golden Head will be the first to collapse when they have to identify their true ownership and real sources of income.
Will look like the Van Westside disaster where 80% of Van prices are still slashing like a horror show.
http://www.myrealtycheck.ca
I’m well aware of the impact of fees. It’s still an optimization and not a fundamental factor though. Regardless of how low your fees are if you aren’t making the money it won’t help you.
From the article.
“As illustrated, 1% versus 0.5% may not feel like much over the course of a year, but when saving for retirement, it could mean the difference between retiring at age 70 versus retiring at 73.”
A 3 year difference is nothing to sneeze at, but it’s not a difference between success or not. Stating dollar value differences over 40 years is a little misleading given inflation. Present value difference would be way more honest
They’ll just build more condos. No supply issue there for the next 500 years
Quite a bit more than “sort of”, actually.
Looking solely at the sizeable herd which blithely pays the “management” fees within their mutual funds they could be down by about $500,000.
https://www.nerdwallet.com/blog/investing/millennial-retirement-fees-one-percent-half-million-savings-impact/
Sort of. How much less would you be worth if you bought every extended warranty and lowered your deductible and bought mutual funds? Maybe 5% less?
The majority is still hustling and working hard
What about the water front land and the second house and the massive garage with a studio and office and the pool, and the half million in landscaping?
I could see $14 million easy. Absent wealthy owner with lots of crazy features. “Cost to build” was probably 7 million though. The rest was the profit to the builder….
And what do you base that comment on? Oh I know – the contrarian’s argument.
Original asking price in 2010 was $13,500,000.
Really? That figure seems extremely high to me. Can someone who knows more than I do about construction please comment on this?
So, in conclusion, almost all inspected drain tiles have issues, but those issues are only causing damage in 20% of cases.
Marko, in those 50 cases, were the issues usually related to the whole drain tile system, or were the issues only limited to a small section of the drain tiles?
Really people with mansions are going to down size to condominiums? Queen Elizabeth and Phillip are going to get a little one-bedroom in Fulham are they?
“Somewhat amusing how a 2-acre waterfront estate with 11 bathrooms can be cheaper than a downtown condo for $10 million. Methinks the ~20yr boomer downsize may have begun.”
No bias against condominiums here 🙂 Simply pointing out examples of what may start happening with prices as the boomers downsize from their mansions to condos over the next 20 years…they may even start going 48% over ask…lol.
Because you can’t disagree with a real estate agent’s logic or lack of.
Home owners should have their drain tiles checked once a year, drain the rust from their hot water tank and replace the batteries in their smoke alarms. The only one that does this, on this blog, is Introvert.
Most of the rest of us let it slide but does that mean our drain tiles are choked and collapsed, the hot water tank is about to leak, and the house might burn down? Well if 100% of the time there is a problem with drain tiles then my advice would be not to book that trip to Puerto Vallarta in November. Wait till March.
Years ago I met Dolly Parton in Vallarta at the Governor’s beach retreat. She’s really really short. I mean you could rest your beer on her head short.
What the actual crap though. That building, even post reno is not the cream of any crop. If they were willing to pay $725k, they could have got MLS 386519. Who does that?
I’ve been through that park every month or so for the last 3+ years. Never seen needles or poop (human anyways). Sometimes there’s a tent or two in the bushes and it doesn’t bother anyone. It’s a great park.
I tried getting a used Leaf but my landlord refused to install a charge port. It would have been 75% covered by a government program, and I was going to buy the charger itself. If it’s not a money maker, why go for it I guess. Ended up getting a Honda Insight cause the premium on Prii was too high. $35k for a base model 3 is still ~double what I want to pay for a commuter.
But in how many of those 50 cases was damage being caused to the home as a result of the drain tiles?
Less than 20% of the time.
I don’t doubt that. Why would you ask for a drain inspection unless you already suspected or were alerted to a potential problem? It’s like ordering a blueberry pie and then being surprised to find blueberries in it.
Because homes don’t flood in August…they flood on a cold windy night in November when you are in Puerto Vallarta and your tenant is displaced.
If dropping 800k on a house not sure why you wouldn’t spend an extra $300 to know what you dealing with? I always tell my clients not to expect the seller to budge if the drain tiles are trashed but at least you have the option of walking away from the deal or you know what you are getting yourself into.
Common sense also needs to be applied like everything else.
If the drain tiles are in rough shape but the house sits on a high-point on rock on a crawl space, there is no evidence of moisture and the sellers have been there for 30 years probably not a huge concern.
but if the drain tiles are in rough shape and your house sits on clay, at the lowest point on the street, it has a basement rental suite 5′ below grade you will depend on to make mortage paymets, the current owners have only been than a couple of years, and you like to vacation in Puerto Vallarta in November I would be very concerned.
I don’t doubt that. Why would you ask for a drain inspection unless you already suspected or were alerted to a potential problem? It’s like ordering a blueberry pie and then being surprised to find blueberries in it.
Different market segment. The downtown condominium and the North Saanich Mansion do not share the same target market of prospective purchasers. Therefore they are not alternative properties that a prospective purchaser would choose from and can not be compared to each other.
You’re showing a bias against condominiums with the incorrect assumption that a condominium is less desirable than a house. Less desirable to whom? Certainly not to those that want to buy a condominium. For those people a house is less desirable for many reasons.
As for the house in North Saanich, that was a great buy. I’ve been in the house several times and it cost the original owner over $14,000,000 to build. And since then construction and land costs have increased dramatically. The purchasers received good value for their money. That doesn’t mean that they paid too much or too little given the current market just they just received a lot of utility and quality for nine million.
Side note: the electric bill on that property is over $10,000 a month.
Somewhat amusing how a 2-acre waterfront estate with 11 bathrooms can be cheaper than a downtown condo for $10 million. Methinks the ~20yr boomer downsize may have begun.
You guys are really causing me to rethink my assumptions on fixed vs. variable.
In just under two years, I’m going to take a really hard look at the variable, unlike at renewals past.
But in how many of those 50 cases was damage being caused to the home as a result of the drain tiles?
Depends. Buying new not really unless you drive a lot. EV still too expensive.
100% doesn’t make sense. What makes sense is a Honda Fit.
The big thing for me is time. In 2+ years of ownership the car has only had a few hours down time (flat tire). No trips to service, no trips to gas station, etc., and those things were an annoyance for me especially when you are barely on time from appointment to appointment.
As I’ve said before I don’t really care about the environment. If I really cared I would be living in a 500 sq/ft condo right now. Instead I look like I care because I drive an electric car even though I cut down 20 trees to build my house and it is bleeding heat in every direction possible.
Electric car owners, especially Tesla, are super annoying for the most part. A lot of them actually think they are changing the world. It drives me nuts. Can’t stand the custom licence plates either…we get it, the car is electric.
B.C. Ferries mulls passenger service between Royal Bay in Colwood and Victoria
The idea of a passenger ferry between Colwood’s Royal Bay and Victoria is surfacing again, this time with B.C. Ferries considering the idea.
This concept is in a very early stage and no study has been planned or carried out, Deborah Marshall, spokeswoman for B.C. Ferries, said Friday.
http://www.timescolonist.com/news/local/b-c-ferries-mulls-passenger-service-between-royal-bay-in-colwood-and-victoria-1.23156722
North Saanich home sells for $9 million
A Calgary couple has spent $9 million to acquire a two-acre waterfront estate in North Saanich, making it the highest price for a home sale through the multiple listing service in that municipality.
The property had been listed with Wilson for 224 days. It had been on the market with other agents earlier. Its previous owner is based in Wetaskiwin, Alta.
http://www.timescolonist.com/business/north-saanich-home-sells-for-9-million-1.23156302
And… you would probably not be surprised to find that most perimeter drains older than the 1980s are completely broken. Either collapsed clay pipe or filled with silt and roots. At least it is better than many places in the interior where they have never even heard of perimeter drains.
I’ve attended over 50 drain tile inspections and I’ve never seen concrete or clay tiles given a 100% clean bill of health. Something is pretty much always blocked or collapsed.
Probably about right. 80% chance of being better off with variable every time you make the choice (at least historically), so do that 5 times. Let’s assume the amount you are better off or worse off by is equal.
That means:
Probability of being better off over 25 years = 1-(2/10)^5 = 99.97%
Yet the majority of people go with a 5 year fixed. Kind of like 2% MERS. Kind of like paying $30k in real estate fees to sell your home in a hot market because the listing agent with put together “a comphrensive marketing plan in action” the minute you sign the contract….etc. and then to top it all off they line up at Costco to save a few dollars on gas…..I totally don’t get it.
The older I get the more I realize doing well financially is just a bit of common sense. I dropped out of grade 12 calculus cause I was so dumb and received 18% on the first test. Spent that free block driving my Fiero around the Fernwood hood 🙂
But even I know 80%^ 5 is around 99%.
It’s like how do you think your 2% MER guy on the 6th floor will beat the the other 2% MER guy on the 7th floor one building over? The only winners are the people collecting the 2% MER.
And… you would probably not be surprised to find that most perimeter drains older than the 1980s are completely broken. Either collapsed clay pipe or filled with silt and roots. At least it is better than many places in the interior where they have never even heard of perimeter drains.
At least if you dig up your entire outside basement wall to add drains, you can also add waterproofing and insulation on the exterior side of the concrete, right? Right? Yeah, good luck on anyone thinking to do that.
Josh, did you miss out on that house sale in Ardmore?
Yeah I think a summer crash is likely. I ran into a lady in the grocery store who was having trouble with her bills. 30k in credit card debt! It’s over bears.
Introvert:
Stop beating up on Hawk; after all he did not specify which summer the prices will crash so he is probably right that that at some summer in the future prices will crash.
Besides the unit does have a new railing. I do wonder about the appeal of being in a downtown which is increasingly becoming a forest of high rises.
@Richard Haysom
Doesn’t work like that. Someone selling their house to upgrade in the same market does not add anything to inventory. Whether they trade up or renovate is entirely immaterial. It puts a damper on sales, but doesn’t move the supply/demand balance.
Added to the list.
On EVs (my other favourite topic).
Depends. Buying new not really unless you drive a lot. EV still too expensive. Used, starting to make sense. Leaf’s around $15k now or less for a few years old. Makes good sense as a second vehicle for commuting. New electric will probably be the same price as new gas in about 4-7 years.
Maintenance on the vehicle itself is basically nonexistent. Battery on the vehicles with proper temperature management (Tesla, Bolt, Volt) will outlast the car, on a Leaf probably will require replacement at the around 10-15 year mark in our climate.
About 2 years for our situation. Depends. See my calculator here: https://1drv.ms/x/s!AtGPo4j9IX0ui6RrTLyDSY9parKn9g
Yeah this is changing soon. Every vehicle manufacturer has announced dozens of electric models coming in the next couple years including SUVs.
Given our clean renewable hydro power, driving an EV emits about 2g of CO2/km. Compared to about 100 for a Prius. Even in areas with dirty power, an EV gets cleaner over time as the power grid gets cleaner. A gas car only gets dirtier over time.
Hydro rates increase at about 3% a year. The only problem is political forces stupidly decided to freeze them for a long time, necessitating steep increases to catch up. Would be much easier to just let them increase by 3% a year steadily.
Hmm.. Too close to downtown, too many needles.
Right. Variable seems scary (we went fixed too), but realistically most of that is probably a hangover from the 80s. If interest rates spiked enough now that you were in trouble, they would immediately tank the economy.
Possibly. I may well regret arguing for site C at the community consultation sessions. Let me tell you, it was a hostile room.
Care to share it? Thought about it, but how to assign probabilities? Seemed to me I would just be guessing.
Insurance, especially earthquake insurance seems to be on a very sharp increase.
Time of use rates are coming to BC soon. Opt-in at first. They are a good idea to help delay infrastructure spending.
Probably about right. 80% chance of being better off with variable every time you make the choice (at least historically), so do that 5 times. Let’s assume the amount you are better off or worse off by is equal.
That means:
Probability of being better off over 25 years = 1-(2/10)^5 = 99.97%
So your 99% was a good guess. Even better guess: 100%.
Of course that during times of declining rates. The chance may be quite a lot lower going forward, but still likely to be >> 50%
Wonder what rates will be when we’re all paying our share of Site C? Here’s my long term prediction: Massive overruns on Site C require a tripling of electricity prices. This, in turn, causes the population to adopt more efficient energy sinks (houses, cars, lights, etc.). Alternate energy sources become mainstream and overall demand drops significantly.
Lack of revenue requires hydro to implement a huge monthly flat fee for any connection to the grid and we all end up paying big $ anyways. Or not.
Disregard all that other stuff Hawk said was inevitable but wasn’t.
Classic hawk post! One for the ages. Glad to have you back!
“Holy jumpin catfish…48% over ask!?
Then again, it does have “new balcony railing””
Mistype or money launderer. Condo crash is inevitable by summer, listings flood, last of sheep pool sucked in, credit lending keeps tightening, yer cooked.
Holy jumpin catfish…48% over ask!?
Then again, it does have “new balcony railing”
Condo appreciation right not is not sustainable. The spread between condos and SFHs is shrinking quite a bit. Either SFHs see another run up or condos must level off.
Condo prices must be up at 5% in the last 60 days alone.
Keep in mind, current rates are artificially low, as BC Hydro—under the direction of successive BC Liberal governments—stuffed $5 billion of debt into various deferral accounts, which will have to be paid off someday through higher rates or through higher taxes.
And then there’s Site C, which will cost a pretty penny even before the cost overruns.
Lastly, it’s worth noting that when the BC Liberals first took power in 2001, Premier Campbell “inherited a single $200 million deferral account from the previous New Democratic Party government.”
http://vancouversun.com/news/politics/rob-shaw-b-c-hydros-awkward-case-for-rate-freeze-puts-ndp-promise-into-jeopardy
http://vancouversun.com/opinion/columnists/vaughn-palmer-hydro-deferral-rat-keeps-getting-bigger
That’s a good point.
Completely agree. Companies have crunched the numbers on how often their stuff breaks, and they wouldn’t offer extended warranties unless the math worked in their favour.
I think it’s more that people probably tend to (vastly) overestimate the risk of a variable rate, myself included.
Well, it’s top floor, across from Beacon Hill Park – so pretty much the creme de la creme of condo’s I would imagine.
Wood burning FP in a condo??! Wow, they let anything go back in ’76 didn’t they? At least Hydro costs have stayed the same, plus they have the option of heading over to Beacon Hill Park, sifting through the human feces and needles and garbage – for firewood!
Its true that Hydro rates have gone up 24% in the last four years – under the rule of the Liberals… and risen approx. 70% since 2001 – during Gordo and Krusty’s reign..
So they went from ultra rock bottom to just low on a global scale.
However, still lower than almost all other North American cities, and certainly lower than most other countries…
From: https://www.bchydro.com/news/press_centre/news_releases/2017/fact-sheet-rates-april-2017.html
“BC Hydro has among the lowest rates in North America.
Adjusting for inflation, electricity in B.C. costs the same today as it did back in 1976. In fact, the average family pays more than twice as much for their TV, internet and phone services than they do for their electricity.”
Do you not get a Hydro Bill Number 6?
Tier one is up to 1289KWH at 0.0858 per KWH
Tier two is 0.1287 per KWH for usage over Tier one
Plus a basic charge of .1899 per day
Plus a rate rider of 5%
Plus GST at 5%
So, depending on usage, but for average people it averages out to about 10 CANADIAN cents per KWH, as Leo stated in the last thread… this is about 0.081 US cents per KWH at current exchange rates… Actually , I noticed my last Hydro bill didn’t go over Tier one but this is b/c I have Natural Gas.
This is still lower than most of the rest of the world… 🙂 And, we have a mild climate to boot… 🙂
Plus… Hydro rates are frozen this year… 🙂
Holy jumpin catfish…48% over ask!?
Then again, it does have “new balcony railing” 🙂
I’m thinking that someone that locked in at 5 year fixed rate at 2.4% good until 2021 is going to be better off than someone going variable at that time a couple years ago? No?
Cherry picking points though. I locked into a 2.05% end of 2014 and that is now 2.55% as rates have gone up. I can’t remember exactly what the best 5 year fixed at the time but it was higher than 2.55%; either 2.69 or 2.79% so I am still below that.
You can cherry pick two points but if you consistently go variable over and over gain for a 25-year mortgage as I said stats must show a 99% chance of savings vs fixed. Leo can correct me 🙂
Of course, this asssumes a reasonable 0.5% to 1% spread between variable and fixed.
In other words, you can swallow some risk more easily than most.
How does a 5 year fixed reduce your risk? You are still out of luck at the 5 year mark.
Too many anaologies to list….its like people that have $300 or $500 ICBC deductibles. I’ve always had $1,000 deductibles and it substaintially reduces the yearly premium. How is your risk reduced if you have a $300 or $500 deductible? In the unlikely event you are in a $700 accident you’ll be a few hundred dollars ahead for the pleasure of dealing with ICBC?
If I’ve saved $100 per year my savings already cover the absolute worse case scenario ($700; the difference between the $300 and $1000 deductible) + some.
Or it is like people that buy extended warranties…..sigh. Who do you think is making the money on the extended warranty? You might luck out once but you won’t win over a span of 50 years.
If you can’t stomach the variable going up 2% HIGHER than the best fixed rate than you are really buying too much real estate.
Definitely could have told you all last year that price of oil was going to go up when OPEC decided to clamp down on the amount of oil they produced. Also could have told you it was going to go down considerably when they opened up the taps before that.
Mortgage days are behind me, praises be, but always took variable. Figured the cost of the money this month is the cost of money this month – who am I to gamble or predict what it might be five years from now?
Saying that a fixed mortgage is best is like putting storage tanks on your lot to fill with gasoline every time the pump price drops a few cents a liter. None of us has any more idea of the future price of money than we do of the future price of oil.
“The good ole days”
For one, plan for not racking up $30,000 in credit card debt.
Marko, your guess is probably right, but you should also remember that your relationship to money and to real estate is not what most people’s is.
You’re probably in the top 2% of Victoria income earners, and you’re a realtor who has zero apprehension about selling one or more of your properties, should the financial need arise.
In other words, you can swallow some risk more easily than most.
I bet you would be surprised to find that many of them don’t have perimeter drains.
You would learn quickly that in order to finish these basements you have to put in perimeter drains and sump pumps. Many a child growing up in Victoria also had mushrooms and black mold growing in their bedrooms. But then their furnaces were wrapped with asbestos too. And Dad would come home and drive his 58 Buick that ran on leaded gas and park it in the basement garage. While at the same time little Johnny and his sister were playing with the mercury from the broken kitchen thermometer on the kitchen table.
Leo, great post.
Our next renewal is in late 2019. We’ve only ever done five-year fixed terms.
If we couldn’t stomach the variable when rates were going down, I’m not sure how we could do it when rates seem to be going up!
It if the difference is >0.5% I am going variable every single time. If you commit to this strategy 5 times in a row for 5 years statistically speaking I am guessing you must be in the 99% range of being ahead versus doing a 5 year fixed 5 times in a row. Math is not my strong point, but my common sense is half decent.
I’m assuming those electrical rates are tier one rates before BC Hydro increased rates by 25%.
I’m thinking that someone that locked in at 5 year fixed rate at 2.4% good until 2021 is going to be better off than someone going variable at that time a couple years ago? No?
I guess we’ll have to wait and see what rates look like in 2021 though…
Thanks for the interesting look at how variable rates compare to fixed Leo…
Number 6- while I’m aware none of the basements w/ driveways that slope down in towards them were meant to be lived in – on street’s nearby I see plenty of cases where they’ve been converted into suites. They look ridiculous and I can only imagine the health problems people endure living in these damp suites.
Guess it appears that most people aren’t as miffed about it as I am. It’s def. a Victoria thing as I’ve not seen this anywhere else. Why on earth people think it’s ok to have a damp basement even if you don’t live in it. Who wants mold and damp and smell and rot in their house? Not me. But hey, I guess many Victorians are so used to it and not bothered by it. And don’t tell me sump pump is a great thing – I’d much rather use gravity over a sump pump any day!
As for the electricity rates – sorry the link I provided to compare countries in the last post wanted a subscription. I only got that after going there the second time. Weird. A bit like Globe and Mail. Who pays that?
What I’m saying is at approx. 8 US cents/KWH we are among the cheapest in the world for electricity. Here’s another link on how we compare: https://www.ovoenergy.com/guides/energy-guides/average-electricity-prices-kwh.html
Wow – something else must make those Danes happy b/c it’s not their electric bills when they’re paying 41 US cents/KWH – over 4x what we pay! Even the US pays more than us at 12 cents/KWH.
Other places – like Ontario or the UK – pay different rates at different times. This is why storage heaters are popular in UK – storing the heat up at night to release it during the day (since electricity is cheaper at night). Thank goodness we don’t have to deal w/ that nonsense here! They were never all that efficient anyway. Want to talk about how complicated rates can get? – head for Ontario – No thanks! I’ll take balmy BC and our low rates and low heating costs due to that and the balmy-ness any day!
Perhaps you could provide us with a list of what a person should plan for after buying a house?
Barrister:
Our cash flow is still plenty in the positive . We try to only increase rent every 2 years as needed since we have good tenants. We bought 2 years ago for around 620 k. Rent out both top and bottom bringing in $4250 per month in rent. After all costs we are about $900 cash flow positive per month. Haven’t calculated the cap rate…
What do you mean wait until time for insurance renewal? You expect insurance costs to jump up as the value of the property goes up?
Point 1 – Banks generally seem to promote fixed more than variable
Point 2 – Banks do not have your best interests at heart
Point 3 – Generally** choose variable
**If the fixed-variable spread is really low like it has been off an on over recent years then this may not always hold.
Right now I think you could get a variable for about nearly .75% less than a fixed
Canadian banks can’t offer 30 year fixed rate closed because after 5 year term they can only charge a nominal prepayment penalty. They can’t offer 30 year fixed rate open (repayable or refinancable at any time) like the US because our government doesn’t support the market for it like in the US.
Here is an article that touches on the history of the US 30 year loan. https://qz.com/884271/ben-carson-doesnt-seem-to-understand-americas-30-year-fixed-rate-mortgage-do-you/
Josh:
I hate those accidental car purchases. Forgot my reading glasses and while my wife wrote carrots on the grocery list I misread it and thought it said car. it happens.
Josh:
Ouch, I just checked my credit cards and you aright they are running at about 18% or more. Life has become complicated and my wife has typed out a little cheat sheet for you directing which credit card to use for what depending on what perks you get. This for gas, that for the grocery store and a different one for restaurants. But I have to confess that I never looked at the interest rates which seem to really vary depending on the card.
Was going to say basically this. Did they accidentally buy a car? It blows my mind how people manage to make decisions like that. I wonder how many other people are relying on short term RE gains to cover all their shiny new appliances and furniture at 18% on their credit card.
Running into unexpected expenses is almost inevitable with four kids and a house. Running a credit card balance of 30k is absolutely insane. The interest payments on that must be murderous. How did they get into such a mess?
Boosa:
Dont worry, your 4% rental increase will make up the difference for the increased mortgage and property taxes. Wait until you get your insurance renewal bill. Hopefully you are still cash flow positive and, if not, it may be time to consider selling. I have run into a few people that are actually running an ever growing negative cash balance on their rentals.
(From the previous thread:)
From this, we can readily conclude:
A) Poor budgeting has its consequences, and
B) An absolute reliance on short-term price increases means you’re doing it wrong
A huge down payment should always be the goal.
It wasn’t the actual month-to-month cost of living increase that burned this family (COL didn’t go up 300% since last summer); it was piss-poor planning and zero emergency fund that burned them.
Wish I saw this yesterday when we signed our renewal form… our rate went from a 2 year fixed 2.19% to now a 5 year fixed at 3.09%. It is a rental property so I think we still took a good option. Hard to believe our property taxes are now more than $400 per month — that bites more than the rate increase.
After seeing these charts, we may go with variable for our principal residence when our mortgage comes up for renewal in spring 2019.
Leo:
That is a great chart and a great topic. I think it is extremely helpful for anyone renewing their mortgage. It provides an excellent visual for those of us that are mathematically challenged. The only thing that I might question is your suggestion that interest rates are driven by inflation. While a major factor it is far from the only factor. Increasingly money is a global commodity and capital flows to the best rate to risk environment.
You also ask a question that I have repeated asked and never got an answer of any type. Why can you get a fixed thirty year term in the United States and not in Canada? Does anyone out here have the answer?
I went through a similar analysis in the summer. I used a probability weighted scenario analysis model based on the 1.85 variable I had and an opportunity to take a 2.38 fixed with a 3 month interest break on the variable. I refinanced with the fixed. It only took 4 months for my old variable to get above my new fixed and I don’t think I need another rate increase to break even over the term. Everything from here on out is gravy.