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What Nobody Is Telling You About Fixed Rate Mortgages

My father keeps the news on constantly. It’s like an addiction, and CP24 is his drug of choice. It hurls bad news all day and all night. Not because it’s helpful, or even that interesting – but because it keeps his eyeballs on the screen. My father isn’t alone. CP24 and other 24-hour news sources are tattooed onto screens across the country.

Unfortunately, a lot of that bad news has to do with the housing market. It seems as though there’s a constant parade of “experts” telling you that we’re in a bubble. To sell now and rent until the market corrects itself. To avoid “risk” and go with a fixed rate mortgage. 

This last myth in particular has gone viral and needs to be dispelled.

On paper, there’s never been a better time to get a fixed rate mortgage. With countless tweets and talking heads warning that rates are bound to skyrocket, it seems like a no brainer. Why wouldn’t you secure a low fixed rate for five years, especially when the economy is so volatile?

In my last article, I told you how dangerous it is to fall into this trap. Now I want to tell you why variable has been the proven winner for over 30 years. 

Record Low Variable Rates

Homeowners are getting way too excited about record-low fixed rates, when they should really be getting excited about record-low variable rates. Why? Very simple: They’re lower! Yes, there’s always the risk they could go up. But consider the amount of time it would take for rates to increase past the current average fixed rate. 

You’ll be able to enjoy months – probably even years – of variable rates that are next to zero. The money you’ll save during this time will more than cover the money you’ll spend if and when rates go up. Consider the total cost of borrowing long term when making these decisions. It’s a marathon, not a sprint.

Rates Won’t Increase Substantially For a Long Time

Don’t get me wrong – rates will increase eventually. Rates this low only have one way to go. However, they certainly will not increase as quickly as the mainstream media is telling you. Some of these reports are forecasting up to eight rate hikes over the next two years! The Canadian government is far too powerful to let this happen knowing the chaos that would soon follow. 

As I mentioned above, consider the long play. And consider what’s realistic. Interest rates would need to increase around four times in less than 18 months before you begin to be in a loss position. Let me be clear: this is extremely unlikely to happen.

Fixed Rate Mortgage Penalties

Did you know the  average Canadian changes their mortgage every three years? And yet, over half of all Canadians choose a 5-year fixed rate term. That’s what makes fixed rates so dangerous. While the penalty for walking out of a variable rate mortgage is capped at three months interest, the penalty for a fixed rate mortgage has no such cap.

You could end up paying penalties of up to 10, 12, 14, or even 16 months interest. That’s not even from some obscure private lender. That’s from ALL of the BIG SIX banks. With those kinds of penalties, a $500k mortgage could cost you $12K, $14k or more to change or exit. If you’re looking at the total cost of borrowing, these fixed rate mortgage penalties would take you way above the cost of a variable rate mortgage. 

The Bottom Line

Variable rate mortgages are the way to go, even now. There are generally only two situations when I recommend fixed rate mortgages: One, to help borrowers with regular cash flow on their investment properties; and two, for people whose sleep hinges on whether their rates will go up or down. Even for those people, I recommend choosing a fixed rate product with a financial institution that penalizes fairly – not a BIG SIX bank. 

I say this every time I walk into my father’s living room, and I’ll say it again now: turn off the news. Stop filling your head with fear. Look at the numbers. Understand why variable rate mortgages just make logical sense. Don’t be swept up by sensationalism in the media. Trust the professionals instead to make sure you’re making the best choice long term. 

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; steve@canadamortgagenews.ca

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