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2 Mar

Variable vs Fixed?


Posted by: Ben Bourgeois

Speaking with a Mortgage professional and asking their opinion on whether or not you should go with fixed interest rate or a variable interest is one of the most common questions in the mortgage industry. Do you go with the cheaper 5-year variable rate, do you go with the shorter term cheaper fixed rate or do opt to go with the more expensive five-year fixed rate? This is a common dilemma, please allow me to shed my 2 cents on the subject.

The current state of the market is on a slight upward trajectory. Current fixed rates have risen the past five months slowly and could continue to climb. There have been new rules set in place which makes the market less competitive than it once was and more expensive for lenders to operate in. Unfortunately for the consumer these circumstances usually only translate into one thing, less money in your pocket. For these reasons, my suggestion would be to not go with a 2-year term which is currently sitting at about .25% lower than a standard five-year fixed term.  sure you get a slightly cheaper rate but what are the rates going to look like in two years? Is it worth the risk for .25%? Now that we have one option out of the way lets take a peek at how a variable mortgage looks vs five year fixed.

Variable mortgages are always the bank’s prime rate + or – basis points. The Bank of Canada sets prime rate which every lender but TD currently uses which is 2.70%. If prime rate fluctuates so does the interest rate you’ll be paying. Now there are two types of mortgages, high ratio(insured) or conventional (not insured). For this blog entry, I’ll compare two high ratio products. Currently, the best interest rate on a 5-year variable is prime -.70 which currently translates into a fantastic rate of 2.00%. The best 5 year fixed is 2.59. That’s a big difference! In order to understand variables rates further, let’s take a look at the history of the prime rate. What has it done the past 10 years?

Looking at the above link, if you were lucky enough to have prime -.70 since 2009 you would have been a major winner! This means you would have been paying between 1.55% and 2.3%. People who took the risk were rewarded. Now don’t rush out and get a variable mortgage just yet. If prime were to go up 1% in the next year you would definitely be on the short end of the stick. If prime were to go up 1% two and half years from now you would break about even.

Now the real question is “Where is prime rate going?” There are several different opinions, some economist say we’re in for a rise in prime rate, others think it will stay relatively the same. The fact is no one really knows. Very few predicted the economic crisis we had a decade ago and those that did not make it public knowledge. This is a classic risk-reward scenario. Are you someone who likes to roll the dice? Or are you someone who buys extended warranty with every product. My advice is if you like to gamble go with variable or if you like to play it safe go with a fixed rate.