Should You Lock In Your Mortgage On Investment Properties?

Kelowna AccountantMortgages are a hot topic with any tax advisor and they are certainly no stranger to Kelowna accountant, Ken Davidson. In this blog, Ken gives his advice on whether or not to lock in an interest rate for mortgages on investment properties.

When it comes to real estate investing, the debate on variable interest rates vs. fixed is a hot one with many different perspectives and beliefs. The question always boils down to the simple “yes or no” answer that everyone seeks…but there is never a simple, straight answer because that would be too easy!

The answer, generally, is yes. The reason why I say, “generally yes” is because it’s the old sleep-at-night syndrome. When you’re working on a long-term buy-hold-rent strategy, you want your projects to cash flow when you acquire them. You also want to have cash flow for the future!

Related: How Can I Get More Knowledge On Real Estate Investing?

To know what your interest rate is, lock in and know what your payments are for 5 years gives you the peace of mind of knowing that once you’ve rented it out, you’ll be in good shape.

Now if you go variable and interest rates go up, you may end up with a cash flow problem. Hopefully you will have built in enough reserve that you won’t run into problems right away.

Locking Into An Interest Rate

On one hand the odds of interest rates staying the same as what they are today are pretty slim, on the other hand the difference between a variable differential and a fixed mortgage are so close that the project and size you are dealing with in your investment will not make a lot of difference.

I hear people saying it does matter because it’s the difference between 3% and 4.5% and that’s a 1.5% difference.

Here’s the thing…if your project is so tight that you have to make it work on a 3% mortgage and that’s the ONLY way it works, the odds are that it’s too tight of a project. If it doesn’t have enough flexibility with it then there probably isn’t a high return either!

But What About When Interest Rates Go Down?

The odds of interest rates going down significantly enough from where they are today (in the next 5 years) is pretty slim. It likely will not happen since we’re already at very low rates.

Going back to my original point…why I say, “generally yes” is because you can have that comfort level to know that it’s not going to change and the differentials are so tight that it shouldn’t matter on the project. What you’re giving up in interest expense really shouldn’t matter on the project, and if it does, it may be time to re-evaluate if the project makes sense at all.

Related: How To Choose The Right Real Estate Investment Strategies

Has your experiences left you feeling more comfortable with a variable or fixed-rate mortgage in your real estate investments? Leave a message in the comments below.



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