Cash flow is definitely king when it comes to owning a rental property, but what can you do to ensure you receive the maximum amount of cash flow out of your rental property? You can always start by looking at your mortgage.
There will always be an ongoing debate amongst mortgage holders regarding whether variable rate mortgages are the way to go or a fixed rate mortgages is better. I personally have both, but my preference has always been variable rate mortgages.
With rates as low as they have been over the last several years my variable rates have saved me tens of thousands of dollars in interest payments, allowed me to reduce the principal of my mortgages faster than a higher interest rate fixed rate and given me as much as a few hundred dollars extra a month in cash flow. Would that be enough for you?
What About Rising Interest Rates?
The biggest concern I always hear about variable rate mortgages is based on the fear that mortgage rates will skyrocket and you will be stuck with a rate much higher than you currently have. With a fixed rate you don’t have to worry about that is the standard answer. Great thinking, if you base your investments on fear.
Economically huge interest rate increases would stymie any economic growth the country may see in the future so that alone will impede skyrocketing increases. To keep the economy in balance, there may be the need to increase rates, but it would have to increase almost 2% from current rates to affect most variable rate mortgages, especially those with discounts off of the prime rate.
This type of increase also wouldn’t occur over night, it will take at a minimum of two years for that to occur and that’s if not just the Canadian economy, but the global economy pick up steam and currently that doesn’t look to promising. During those two years (or more), investors (and homeowners with variable rates) would still be far ahead in the lower amount of interest they have paid, the amount of additional principle they have reduced and the extra disposable cash or cash flow they have in their pockets.
For those people whose main goal is to simply get their mortgage paid down as quickly as possible, variable rate mortgages make even more sense. At least the mortgages that allow you to make additional payments!
To avoid the sleepless nights that critics of variable rates mortgages talk of, why not make payments as if it was a fixed rate or as close as possible? The majority of lenders allow you to make larger payments each month so why not maximize that payment and then if rates do increase you won’t notice, unless of course it is a huge increase.
My final love for variable rate mortgages is the ability to lower mortgage payouts. Due to their structure, most variable rate mortgages default to three months mortgage payments as a penalty for breaking the mortgage. Fixed rate mortgages can often run into thousands or tens of thousands in penalties. How would that make you sleep?
This can be a huge advantage if you are unsure of the length you will be holding a property or you believe you may have to jump out prior to the mortgage running it’s full course.
In the end, it’s your decision, but given the choice, variable rates help me sleep just a bit easier.