MORTGAGE DECISIONS FOR INVESTORS – 5 YEAR FIXED OR VARIABLE?? 🤷♂️
I have been asked this question many times lately.
HISTORICALLY, IS IT FIXED MORTGAGES OR VARIABLE RATE MORTGAGES THAT HAS SAVED BORROWS THE MOST IN INTEREST EXPENSE?
Answer: Variable rate mortgages!
* I have ALL my single-family property mortgages on variable rates, I have done so for as long as I can remember.
* Why? See answer above. The facts are the facts. Simply google search and see the history and graphs.
* Additionally, I never have a PAINFUL prepayment penalty if I decide to sell, refinance, move the mortgage to a different financial institution, etc.
A common comment I get from many newer investors is: ““Yes Arlen, but I KNOW I will be holding the property for 5 years or longer.”
My Answer: “REALLY?…….” 😅
As the famous quote from Mike Tyson goes: “Everyone has a plan until they get punched in the mouth!”
If you are still hesitant about choosing a variable rate mortgage, let me entertain you with a few REAL-LIFE examples of mine from 25 years of real estate investing.
We can call it the “SHIT HAPPENS LIST” or the “MIKE TYSON PUNCHED IN THE MOUTH LIST”: 👇
1. In the years 2004 – 2006 we had a HUGE increase in property values. I refinanced quite a few properties and paid back all my JV’s investment cash in some cases, and in other cases, we bought more property for “free”. In retrospect, refinancing was awesome, but I did a bit too much refinancing – a topic for a different day.
2. Something tragic happened in the personal life of one of my JV Partners. As a result, he wanted/needed to cash out. As per my JV agreement, I could have simply said “NO, we will be holding on for at least 3 more years. That is not me. He had a valid/sad reason to need to cash out. So we did, and I feel good about doing the “right thing.”
3. I got offered a ridiculously high price for a holding property of mine that I had no plans on selling anytime soon. I sold it for a nice big profit, then simply re-invested the money.
4. An unexpected market crash happened (Alberta, 2008). This required me to sell a few of my properties in my various JV portfolios (for a profit, mind you) to keep our portfolios strong.
5. I had a JV partner go through a nasty divorce. Resulting in us having to liquidate his smaller portfolio of single-family houses we owned together. We had to sell in order for him settle his divorce and move on with his life.
6. Etc, etc (it would not be hard to add more to this list)
Over the course of 25 years, it would have most likely cost me in excess of $500,000 in mortgage prepayment penalties if I would have signed 5 year fixed rate mortgages on all my properties. This does NOT include the interest rate savings benefit of having a variable rate mortgage vs 5 year fixed rate mortgages.
Everyone needs to choose what they think is best for them. For me, it’s crystal clear!! 👊
written for Facebook by Arlen Dahlin