You can find it, along with others, at:

http://canadianmoneyforum.com/showthread.php?t=897

The thought of rising mortgage interest rates makes me nervous. BUT if I understand the SM concept correctly, the idea of the SM is to start investing earlier than “traditional pay down debt then invest” scenario which SHOULD lead to higher compounding non-registered investment portfolio (20 years down the road minus deductible mortgage). With such philosophy, mortgage interest rates would have to skyrocket to eat away at potentially $700K to $1 M extra nest egg when starting a SM now to grow over 20 years.

Am I understanding this concept correctly? Yes mortgage interest rates are a risk to the SM but I think with the anticipated gains it would be hard to beat…plus a bigger tax refund because the interest rates are higher?! Have I overlooked the risks of rising mortgage rates?

Thanks in advance.

What should I do?

Any suggestions

In your first post you state you are getting 1.5% LESS THAN what RBC is currently offering resulting in a current variable rate of 1.75%. This makes sense as RBC’s open variable is Prime + 1%. So your true discount is actually Prime -0.5 (still a very good rate at this time).

Current Prime = 2.25
Premium = +1
Discount = -1.5
Total rate = 1.75

In a subsequent post you state you are getting Prime -1.5%. If you can get this, I would be all over it. However, I would double check as this is a massive discount off today’s rates. I suspect that what your builder is offering is the former that they have spin doctored into what sounds like a bigger break than you are getting (though any discount off prime right now is a deal IMHO).

On an unrelated note, I was a little surprised at the large amount of mortgage principle being carried by some of the writers on this blog and I say surprised because I figured the average reader here is a cheapskate ;)

FYI, I see that many peoples are asking themselves that eternal question but I wanted to let everyone know that as much as we may ask ourselves this question, most if not all of the bank managers I know have been spending 95% of their time answering that same question to inquisitive customers.

I asked a friend of mine what he was doing with that 5% left over? He said: “trying to keep the customer from going to another financial institution”…

So for everyone who these days might have a beef against banks (even as an ex bank manager, I consider myself in this pool), don’t worry, they are also feeling the heat :)

Have a great day!

Prime – 1.5 is really, really good. It’s a no-brainer provided you have enough extra income to cover the payments if the rate goes up to say 4-5% down the road. You may want to ask if get the option to convert to fixed before the term is up and at what premium.

I think that the later you wait, the more likely that bond yields (which is, from my understanding, what banks use to base their longer term lending rates) will tend to go higher reflecting the idea that economies will recover and governments will not only reduce stimulus but will need to start applying the brakes. One way they do that is by hiking interest rates.

You can’t listen to a financial news network without daily discussions about the risk of inflation down the road because of the unprecedented stimulus. Thus, while we are enjoying historically low prime lending rates we may see much higher 5, 7 and 10 year mortgage rates 12-18 months out than we see today.

The only sure fire way to win this battle is to reduce your debt!

checked with RBC about the variable rate mortgages, and the best I could do was prime +0.6% (at least its come down by 0.2% from last time)

If you can get Prime-minus (BKS) – better lock in now.

The largest discount off prime I have heard of is 1.0%. If you truly have Prime-1.5% variable for 5 years, I would take it as that might be the lowest mortgage rate anyone has ever had from a bank in Canada.

was Prime -1.5% for 5yrs variable

This was the special rate that the builder had arranged with RBC.

several banks are starting to offer ‘mixed mortgages’ with both a variable and fixed component. Sorta like have two mortgages.

@ BKS, did you have to push for this? or was this just there normal offer?

make sure it’s 1.75% for the full 5 years. sometimes they have a discount for the first few months, then the discount disappears.

if you can get P-0.5% for 5 years it doens’t seem like that bad of an idea. just run the numbers as to what your payments would be if the bank prime rate was 8 or 9 %.

However, since this is your first home, at what interest rate would the payments become unaffordable? You need to decide if the chance of saving money is greater than the risk of rates going higher.

Oh, and check with a mortgage broker, I believe 5 yr rates are as low as 3.7% range today.

This is what they are telling me

1.75% variable for 5yrs.

Not sure if this is good as a first time buyer. But on the other hand I might be able to pay down more over the first 5 years of the term as the rates inmost cases will not rise significantly to the other offer of 4% that TD is offering.

Can anyone suggest anything.

if you just make prepayments to a regular fixed rate mortgage, you’ll get the same effect as teh M1.

The M1 is a well marketed product. they say you can pay off your mortgage way faster than the traditional way, but that’s only true if you leave extra money in your account every month (as in spend much less than you earn). for a traditional mortgage this would be the same as making a prepayment every month or increasing your payment amount.

the actual savings associated with having your monthly expenditure money sitting in the account and saving you mortgage interest is worth under $100 a year. (ie, the $150 you had allocated for the power bill this month is put against the mortgage value until the day you have to pay the bill.)