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Just a week or two ago, the big banks all raised their fixed mortgage rates – first RBC, then TD bank followed suit. People were frantically calling their mortgage brokers and mortgage specialists to lock in, or to get that five-year fixed rate before it went up the next day.
Most people have heard of the Milevsky report, a York University associate professor of finance at the Schulich School of Business to decided to settle the debate once and for all. He did extensive research and came up with this conclusion:
Based on information gathered between 1950 and 2007, if you picked a variable rate mortgage, you would have saved money 77-90% of the time if homeowners went with the variable mortgage instead of a fixed mortgage- AND chopped about a 1 year off their amortization schedule.
A lot of people that I know who are buying this spring are going with fixed rates instead of variable. Their reasoning (valid reasoning) is that the interest rates are at historical lows, and there is no where to go but up.
The lowest posted fixed 5 year rate is 4.19%. Prime currently is still 2.25%. If you were able to negotiate a good discount off prime, e.g. Prime – 0.5% at 1.75%, there's still large amount of wiggle room for the 1.75% to reach 4.19% within 5 years.
There isn't a one size fits all answer though, just like the debate between paying off your mortgage vs buying RRSPs that Ending the Rat Race recently contemplated, these decisions have to be decisions you feel comfortable with.
So here are some reasons to help you decide to go fixed or variable. It's akin to picking between chocolate and vanilla ice cream. One is stable and predictable, tastes good and safe, the other not so safe, but could be more satisfying and rewarding! If you're using the Homebuyers Plan to get a place this year, it's worth it to take your time and do your homework.
Reasons that a Variable or Floating mortgage isn't for you:
- You stay up awake at night worrying if you will be able to pay off the increase in your mortgage per month
- You call your mortgage broker in the middle of the night asking him or her if they think that Bank of Canada will increase the prime rate and when
- You don't have a predictable job and would like to know how much you pay for the next 5 years, instead of guessing
Variable Mortgages may be good for you if:
- Risk is your middle name. You like risk and are able to take some to reap the rewards
- You plan to rent a portion of the home out. If you are able, you could double up on the mortgage payments to attack the principle amount for the first five years. The Bank of Canada prime rate isn't forecasted to move too drastically until late 2011.
- You negotiated with the bank that they are to give you their best rate should you want to fix
- You bet your bottom dollar that the economy is still in poor shape, and if the Bank of Canada raised their rates too quickly, there will be a housing disaster (read: foreclosures) which the government doesn't want to do
- You have a fat down payment (20-25% of the purchase price) or lots of home equity (read: NOT a first time home buyer) and are hedged against risk
Initially, I wanted to pick a product that was 50% fixed and 50% variable (must have been that flashy marketing for the RBC advertisement) but in the end, am thinking of picking a variable rate. I know that the rates will go up, but am willing to take the risk to be able to pay down the principle faster. So I pick chocolate!
It would be interesting to see five years from now which would have saved me more money! If my blog is still here, I promise to let you all know =)
What do you think, readers? An estimated 70% of Canadian homeowners pick a fixed rate. Would you or did you pick a fixed rate or variable rate, and for what reason? Do you have any other reasons for or against a variable rate that you would like to share?
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