As we mentioned in a couple of days ago, we are currently looking for a house in Ontario as our primary residence. One of the decisions that we have to make is whether we should go to fixed or variable rate mortgage. It is not always easy to decide because nobody knows how high or low interest rate would be in the next 3 – 5 years.
What we can do right is just doing some estimation. We can get prime rate – 0.5% for variable-rate mortgage at the moment, which equals to 2%. For fixed-rate mortgage, we might be able to get around 4.25%.
Suppose that we will have $300K mortgage. Our interest payment for fixed-rate mortgage in the next 5 years would be:
4.25% x $300,000 x 5 = $63,750
Let’s now assume that the interest will go up 1% each year for the next 5 year. Our interest payment would be:
Year 1: 2% x $300,000 = $6,000
Year 2: 3% x $300,000 = $9,000
Year 3: 4% x $300,000 = $12,000
Year 4: 5% x $300,000 = $15,000
Year 5: 6% x $300,000 = $18,000
Total: $60,000
It looks like we can save about $3,750 for going variable by assuming that interest rate will go up 1% each year.
PS: The above calculation is a simplified one. In reality, we have to calculate the amount of principal as well because we will be putting more money into our principal for each mortgage payment.
(Picture is from flickr.com.)
