The fixed rate versus variable rate debate has never been more heated. With fixed rates currently averaging historical lows of roughly 2.25%, a lot of people are left wondering, “why wouldn’t I choose a fixed rate mortgage?” Fair enough – it certainly appears to be a safe bet on the surface. Lock in a low rate. Maintain it for the entirety of your term. Never worry about rates going up.
This belief is fuelled by the big banks spreading hysteria that variable rates are sure to shoot up. Why risk it when you can go with a record low fixed rate? Here’s the truth: The banks are pushing 5-year fixed rate mortgages because they’re more profitable for them. A variable rate mortgage isn’t the gamble it’s made out to be. In fact, it’s by far the more prudent move.
The Bank of Canada meets eight times a year to set the prime rate. As you might know, the prime rate is what affects variable rates. The prime rate rarely changes, and when it does, it’s only by 0.25%.
What am I getting at? The only way that a variable rate would end up costing you more than a fixed rate right now is if the BOC increased their rate at every single meeting, multiple meetings in a row. This almost never happens, and is not likely to happen. The next few years will almost certainly favour those who choose variable rate mortgages right now.
The Bottom Line
Yes, fixed rates are low. But so are variable rates – and it’s likely going to remain this way for the foreseeable future. Right now is an amazing time to get a variable rate mortgage and save a ton of money on owning a home. In the worst case scenario, your variable rate will surpass the current fixed rate in a few years. But those years of savings could make a huge difference.
Another worst case scenario (and extremely unlikely to happen) is that your rate doubles. Everyone thinks that this means your payments will double. But this isn’t the case. If your rate doubles, your payments only go up by 32%. The odds of a payment shock are extremely low.
I’ve recommended variable rate mortgages for my entire career and will continue to do so, even with fixed rate mortgages being what they are. Yes, rates will go up. But you can safely enjoy 1-3 years of record low rates. I am at a variable rate on all of my properties, and I recommend you do the same.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; email@example.com