Fixed vs Variable rates - how to decide?

Clients often ask this question.  Historically variable rates have outperformed fixed rates to the advantage of the client.  There is some logic to this because the client is the one taking the risk of future rate increases compared to the lender. 

If you are a person who would prefer to know exactly what your monthly payment will be, then you would likely be better off with a fixed rate.  Fixed rates are most often recommended for First Time Home Buyers because it is one less thing to worry about.  On the other hand, if you are comfortable with some fluidity to your payments then perhaps a variable rate is more appropriate for you.
 
The current Covid crisis presents a unique position for whether a fixed rate or a variable rate is better.  Most economists are forecasting that it is highly unlikely the Bank of Canada will raise the Key Interest Rate in the next 12 months, with others arguing it could be as long as 24 months. The logic is that the economy will take about that long to recover and the Bank of Canada won't want to do anything to hamper the recovery.  With this in mind, if you can get a variable rate mortgage for 2.45% (as opposed to a 2.84% fixed rate) then you would be saving yourself almost 40 bps in interest for the near future.
 
Prime rates (and as such the effective variable rate) will eventually rise.  And when they do, they usually do so in increments of 25 bps - so the big savings you thought you had can be wiped out pretty quickly.  Potentially you can convert your mortgage from a variable rate to a fixed rate with the same lender with no penalty.  Many lenders (but not all) allow this benefit.  So if you do want this "out" make sure you check to see if your lender does allow it.
 
Keep in mind that many economists are forecasting that lenders will continue to reduce their fixed rates, so some clients are proceeding with a variable rate mortgage in the short term and then will convert to a fixed interest rate in another 6-8 months once they feel the fixed rate is a good rate for them.

If you have questions about your mortgage, feel free to reach out and I'd be happy to put you in contact with a Mortgage Broker to discuss your options at no cost or obligation to you.  


 
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