By far, Fixed or Variable is the most asked question I get as a mortgage broker. I will avoid too much technical and financial jargon here. I will say that that no economist, bank, lender, or even Bank of Canada can predict actual interest rates with any type of assurance in the long run. Unfortunately, not even you or me. Once you accept this as fact, and start to realize what you hear and read about interest rates from the “experts” are merely opinions, this will set up your foundation to making good decisions on which mortgage to choose.
So, what should you consider before making your mortgage choice?
- Inflation is low. That usually means that short-term rates will not likely increase. Could that change? Of course it can.
- If you do decide to go variable, ensure you capitalize on your savings by paying the equivalent payment for a locked in mortgage. I usually recommend setting your payment at least at the 5 year fixed equivalent rate. (Although with the current fixed rates being so low, I would suggest setting a 1 percent spread over the current variable rate). This practice not only allows you to pay your mortgage down faster, but also provides you with a buffer if rates do increase. You also have the flexibility of locking in at a fixed rate at any time at the then prevailing fixed rates. With variable, you are in control, you are paying yourself instead of the financial institution.
- If you are consider choosing a variable rate, ensure it matches your risk tolerance and personality. If you are going to consistently worry and be a “Nervous Nellie” just avoid the variable all together. Making decisions that are not consistent with your risk profile and financial tolerance is not wise. So, if can’t sleep at night because you have a variable rate mortgage, choose a fixed rate. Yes, you will pay more but the cost of tranquility is priceless.
Mortgage Rates are a moving target and will increase and decrease consistently. Look at your situation and what your plan for the property is and your personality before you decide on fixed or variable. Don’t let anyone decide this but you. It must be the best option for you, not the lender.
Here is a typical comparison on fixed vs. variable. (Rates are for demonstration purposes only)
|5 Year Adjustable Rate vs. 5 Year Fixed Rate Payment Comparison¹
|Monthly Payments (Principal and Interest only)
|Principal Paid Down
|5 Year Adjustable @ 2.20%
|5 Year Fixed @ 2.69%
|Difference between payments
- Potential to become MORTGAGE FREE FASTER by paying down more principal
- Potential to save on interest over the term with an adjustable rate mortgage
- Traditionally LOWER PAYMENTS compared to a fixed rate mortgage
- Clients must QUALIFY AT THE BENCHMARK RATE² to help protect them from possible rising interest rates
- Have the freedom to CONVERT INTO A FIXED RATE³ mortgage at any time
- Avoid POTENTIALLY HIGH IRD penalties
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1 Assumptions: $250,000 mortgage amount, monthly payments, 25 year amortization, Prime Rate 2.85%, adjustable rate used for illustration purposes is Prime-0.65% and assumes rate does not vary over the term. Adjustable Rate calculation will change when Prime Rate changes. Rates are compounded semi-annually, not in advance. The Annual Percentage Rate is the same as the Interest Rate, assuming that no additional fees are charged. Calculations compare payments at term end for a 5 Year ARM vs. a 5 Year Fixed Term. (Source: D+H Filogix Express Calculator – Mortgage Analyzer)
2 Benchmark rate is the Chartered Bank – Conventional Mortgage 5 year rate that is the most recent interest rate published by the Bank of Canada in the series V80691335 each Wednesday. It can be found at http://www.bankofcanada.ca/en/rates/interest-look.html. Information, interest rates, terms and products are subject to change without notice.
3 The fixed rate will be set to Fixed Regular rate, for the chosen term, at the time of conversion plus any applicable premiums. Certain conditions apply.