3 Reasons to Always Choose a Variable Rate Mortgage When Buying an Investment Property
When it comes to mortgage financing on your investment property, there are considerations that differ for every property and every situation, however there is one debate that is common for every investor: do you go with a fixed or variable mortgage rate?
Here are 3 reasons why I always go with a variable mortgage rate on my mortgages for my own investment properties, and why you should too:
The variable rate will save you money 90% of the time
The biggest concern when you choose a variable rate is that what if rates go up?
If rates go down, then great, but if rates go up, choosing a variable rate mortgage instead of locking in the fixed rate could end up costing you more interest in the long run.
The truth is that statistical studies have been done that prove that variable rate mortgages can save you thousands over the term of a typical mortgage.
In fact, this study showed that looking at mortgage rates from 1950-2007, you were better off going with the variable rate 90% of the time.
As a real estate investor, I don’t like to gamble or take risks, I like certainty wherever possible, and to me 9:1 are pretty good odds that I will take every time.
Another way to look at it: if you choose a fixed rate, the bank wins 90% of the time. Does that sound appealing to you?
The variable rate is the natural mortgage rate.
What I mean by this point is that we are so trained to think fixed rate first that we forget that the variable rate is more like the actual mortgage rate or what the rate should be.
Remember, money, or more specifically mortgage financing, is a commodity, and just like any other commodity, the cost of this product goes up and down all the time. It’s constantly in flux. This is normal.
So the variable mortgage rate is what I call the ‘natural’ mortgage rate.
Fixed rates are essentially artificially constructed rates by the banks that take advantage of our psychological need for certainty.
Obviously the banks employ some very smart people who make calculations every day to make sure that they are profiting from this need for certainty by adjusting the fixed rates accordingly.
Go natural. Go organic! Go with a variable rate and don’t sweat it!
Variable mortgages give you more flexibility.
When you are investing in real estate you want to set yourself up for success always and in every market and every situation.
You need to have flexibility in all situations to adapt and pivot when situations or markets change or when opportunities arise.
One of the ways you do this is by having a mortgage which allows you to sell if you need to, even if you were not planning on it.
Variable rate mortgages generally have much lower breakage penalties than fixed rate mortgages thus easing the pain if you need to exit a property sooner than you anticipated.
Check out ratehub’s nifty mortgage penalty calculator if you’re interested to find out the difference in penalties between fixed and variable rate mortgages are your lender of choice.