Switching from Variable to Fixed rate mortgage | Mortgages | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Switching from Variable to Fixed rate mortgage
February 26, 2019
1:03 pm
fred_iz
Member
Members
Forum Posts: 4
Member Since:
February 26, 2019
sp_UserOfflineSmall Offline

Hi folks. I have two years on my current home mortgage to reach its 5-year term. It is RBC Homeline Plan with Variable rate. When I signed my mortgage in Jan 2016, the rate was 2.3. Now it is 3.75!! Today, RBC offered me to switch to 5 years Fixed rate of 3.74...... It increases my monthly payment by $200 because of the amortization of fixed rate, which is ok. Because it is eventually the money I have to pay.
Is it a good move to switch?

February 26, 2019
3:04 pm
uniQChick
Member
Members
Forum Posts: 22
Member Since:
February 21, 2019
sp_UserOfflineSmall Offline

I never switched mine, played a Russian Roulette game... and was happy with my choice in the end! sf-cool

February 26, 2019
5:04 pm
Norman1
Member
Members
Forum Posts: 2280
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

The numbers don't sound right.

How can the monthly payment go up by $200 when the rate drops from a variable 3.75%, compounded monthly, to a lower fixed 3.74%, compounded semi-annually?

February 26, 2019
5:11 pm
fred_iz
Member
Members
Forum Posts: 4
Member Since:
February 26, 2019
sp_UserOfflineSmall Offline

Thanks for your reply. The quotation they gave me was based on monthly basis- to make a correct comparison. I pay $2400 monthly for my mortgage on variable; with their offer with fixed rate it will be about $2600 per month.

February 26, 2019
6:20 pm
Norman1
Member
Members
Forum Posts: 2280
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

I think they may have misquoted your current variable rate.

According to RBC Homeline Plan product page, the current rates are

  • variable 3.55% (3.57% APR) compounded monthly and
  • 5-year fixed 3.74% (3.7% APR) compounded semi-annually.

If you accept the early renewal offer, your mortgage rate will actually be going up and not down.

February 26, 2019
7:07 pm
fred_iz
Member
Members
Forum Posts: 4
Member Since:
February 26, 2019
sp_UserOfflineSmall Offline

Norman1 said
I think they may have misquoted your current variable rate.

According to RBC Homeline Plan product page, the current rates are

  • variable 3.55% (3.57% APR) compounded monthly and
  • 5-year fixed 3.74% (3.7% APR) compounded semi-annually.

If you accept the early renewal offer, your mortgage rate will actually be going up and not down.  

Attached you can see the details of my current variable rate. What is 5-year fixed will be if we consider it compounded monthly?Untitled.jpg

February 26, 2019
8:25 pm
Norman1
Member
Members
Forum Posts: 2280
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

3.74% per annum compounded semi-annually is equivalent to 3.71119% per annum compounded monthly:

(1 + 3.74%/2)² = (1 + 0.0374/2)² = 1.03774969

(1 + 3.71119%/12)12 = (1 + 0.0371119/12)12 = 1.03774971

It looks like your variable rate is prime minus 0.20% while the current variable rate offer is prime minus 0.40%.

The fixed rate 3.75% offered is equivalent to 3.711% compounded monthly. That is slightly lower than your current variable rate 3.75% compounded monthly. The only factor left is your amortization.

The 441 months left shown is 36.75 years! Is the renewal offer for a shorter amortization? That could explain the higher payments with the lower rate.

February 27, 2019
4:37 am
fred_iz
Member
Members
Forum Posts: 4
Member Since:
February 26, 2019
sp_UserOfflineSmall Offline

Norman1 said
3.74% per annum compounded semi-annually is equivalent to 3.71119% per annum compounded monthly:

(1 + 3.74%/2)² = (1 + 0.0374/2)² = 1.03774969

(1 + 3.71119%/12)12 = (1 + 0.0371119/12)12 = 1.03774971

It looks like your variable rate is prime minus 0.20% while the current variable rate offer is prime minus 0.40%.

The fixed rate 3.75% offered is equivalent to 3.711% compounded monthly. That is slightly lower than your current variable rate 3.75% compounded monthly. The only factor left is your amortization.

The 441 months left shown is 36.75 years! Is the renewal offer for a shorter amortization? That could explain the higher payments with the lower rate.  

Thanks for your reply 🙂 Yes, the higher payment is due to shorter amortization of 30 years.
Considering the increase in variable rate, don't you think locking in the fixed rate for next 5 years will be a good idea with their proposed 3.74 rate?

February 27, 2019
5:38 pm
Norman1
Member
Members
Forum Posts: 2280
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

fred_iz said
Thanks for your reply 🙂 Yes, the higher payment is due to shorter amortization of 30 years.
Considering the increase in variable rate, don't you think locking in the fixed rate for next 5 years will be a good idea with their proposed 3.74 rate?

The shorter amortization is good. Paying off the mortgage 6¾ years earlier means 6¾ years of interest saved.

The locking in at a slightly lower 3.711% (compounded monthly), down from 3.75%, is not as clear. Rate is lower. But, you are committing to an additional three years at that new rate in doing so.

You may be able to negotiate a better variable rate of prime minus 0.50% (3.45%) in two years when your mortgage term ends. However, interest rates may have moved up ¼% or ½% by then and prime minus 0.50% may end up being 3.70% or 3.95% then.

From a rate perspective, it is quite close to say one way or the other.

February 27, 2019
11:12 pm
Loonie
Member
Members
Forum Posts: 5039
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Norman has been very kind to help you work all this out.
I have nothing to add in terms of the details.

It seems you're down to a toss of the coin.
Seems to me that is when negotiating might be helpful.
I would ask myself why RBC is making this offer at this time. My answer is that they want to hold on to your business in future; they know rates have been going up, and that you might be thinking of locking in. If I heard you right, they have also seen you extend your amortization within a short time of taking out the mortgage. They may be concerned that in future, if rates continue upwards, you will not be able to cope. They may even be under some pressure to rein in amortization periods.
I am not a banker and can't really speak to how they think, but this is how it looks to me.
You, on the other hand, might be willing to accept their offer if it's in your interets to do so. A variable rate might be better for you - or not. A very good longer term rate might also be in your best interests.

So, why not ask them for a slightly better rate and see what happens? You have nothing to lose by asking, and they do want you to lock in. You just need to be very clear what your bottom line is, i.e. what you will accept, before you initiate the conversation.

February 28, 2019
6:10 am
savemoresaveoften
Member
Members
Forum Posts: 135
Member Since:
March 30, 2017
sp_UserOfflineSmall Offline

0.04% diff in rates should not be your deciding factor. If you can afford an extra $200 a month in mortgage payment, see if you can keep your existing term with increase payment each month for the next 2 years, then shop if better rates exist down the road ?

The interests saved from reducing the amortization period can be very significant over time.

March 2, 2019
12:41 am
Norman1
Member
Members
Forum Posts: 2280
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

No renegotiation or early renewal required to increase payments by $200 a month.

Under the RBC Homeline Plan, the borrower can make additional payments on any or every payment date, up to the regular monthly payment, with the Double-Up option:

RBC Royal Bank's powerful Double-Up option gives you the flexibility to prepay any amount between $100 and the equivalent of the principal and interest portion of your regular monthly mortgage payment on any or every payment date.

March 2, 2019
3:16 am
Loonie
Member
Members
Forum Posts: 5039
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Paying down debt as fast as you can without negatively affecting your other financial needs is a plan that is hard to beat! But you also have to get the best rate you can for the large portion that you will owe for some time yet.

But, if you have other kinds of debt (more expensive debt), they should be eliminated before voluntarily ramping up your mortgage payments.

You have a very long amortization, even at 30 years. Maybe worth revisiting the family budget to see if you can make any improvements.

Please write your comments in the forum.