Fixed vs Variable (And Why I Now appreciate my Economics Professor)

I always cringe when I see this heading in an article.  “Here we go….another article about fixed vs variable…..”  What else could they say this time that hasn’t been said a thousand times before?

Until recently, I was quite content going with a fixed mortgage as I told myself that I wanted to sleep at night, knowing my rates were not going through the roof.  I got my first mortgage in 2009 and second in 2010, so needless to say, there was some serious turmoil in the markets and people had begun to look at the low variable rates as something that simply could not go on much longer.

Well here we are in 2011, and the most recent news is that the US has promised to keep interest rates at their current levels until at least 2013.  Suddenly my fixed rates that I took out in 2009 and 2010 are costing me money…..and lots of it.  Had I gone with variable for both, I would have close to $300 in extra cash flow per month.  For arguments sake, I will say that I will have lost out on 36 months of this cash flow….which comes to over $10,000 that I will have left on the table.

Stupid right?  Well, hindsight is 20/20…..and at the time, I thought I was making a smart decision…..and part of me still thinks this was the right decision as I was a new investor and the thought of vacancy loss, repairs and management of my first properties was stressful enough, let alone if I had to watch the ticker everyday looking for signs that interest rates were on the rise.

Overall, I am happy with the returns I have seen over the last couple of years, but with more experience comes the appetite for more risk….

My most recent lease –to-own deal which closed in August, is a variable mortgage at prime – 0.65, which works out to 2.35%.  Because this is a relatively short term, 3 year, investment, I thought I would give it a shot.  I could have gone with a 3.35 fixed, however the cash flow would have been $100 less per month. 

My rational for this choice was as follows:

-         US recent announcement that interest rates would be held until 2013

-         Fact that Canada mirrors the US very closely…whether we like to or not

-         If Canada raises rates, we risk inflating our dollar even further as new foreign investment comes to Canada

-         My cash flow on my three properties combined is very strong and so a fluctuation in rates on one of the mortgages will not land me in the poor house

-         I remember Garth Turner’s book Greater Fool when he said….”If you are going to borrow……borrow like a man”…(funny how these types of comments resonate in your brain….I read this book almost 4 years ago)

You know, I never thought my university economics classes would ever be beneficial.   Who cares what happens to the dollar or interest rates?  What does it matter that foreign investment is coming to Canada?.......well now it matters to me…..in a BIG WAY. 

When you run a real estate business……and it IS a business no matter what anyone tells you…..you have to be conscious of all market factors, both MACRO and MICRO.  Just be sure you are getting the best information you can from the most reputable sources.