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13 Jul

Deciding Between a Variable or Fixed Rate Mortgage.


Posted by: Jason Zailo

As you know, a fixed mortgage has a rate that’s locked in for a set number of years, while a variable mortgage has a rate that floats with market conditions. On average over time, you’ll usually come out ahead with a variable mortgage. One study suggests that between 1950 and 2007, 90% of the time it was better to have chosen variable over fixed.

The reason for this is the premium banks charge on fixed mortgages. For a bank to guarantee a rate for 5, 10 or 25 years, it’s taking a risk that rates will rise during that time, resulting in the bank losing money. To reduce this risk, the bank charges a little more for a fixed rate. Since that risk doesn’t exist with a variable mortgage, the rate is lower.

Having said this, there are other factors to consider. Currently, the difference between fixed and variable rates is very small. At the same time, interest rates are at historic lows. Thanks to all the government stimulus spending, inflation is expected to rise in the next year, therefore interest rates will rise too. So since a fixed rate doesn’t cost much extra right now and guarantees a historically low rate over the long term, many people believe it’s the right choice for the times.

However, the only way to know for sure is to have an analysis done of your financial situation. If you don’t have much equity, are you worried about your job and can’t afford to have your mortgage payments rise, a fixed rate may be best. On the other hand, if you have lots of assets, stable income and can live with some rate fluctuation, you may do better with variable–especially since you can lock into a fixed mortgage as soon as rates start rising. As your local mortgage expert, I’d be happy to perform a free mortgage analysis to help you with this important decision. Call me today!