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youngandthrifty discusses the tricky decision to go for fixed or variable with your mortgage based on the Miloshe Milesky report from 2008.

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?

Article comments

Jamie says:

You promised an update in 5 years…I looked in 2015 archives and couldn’t find it, a little help?

Kyle says:

Sorry Jaime, we haven’t revisited that yet. I can tell you the short answer is that you would have done way better with a variable rate over the last five years as interest rates have continued to decline!

Rhea says:

What about prepayment options and prepayment penalties? Usually you can find a bank that will allow prepayment options attached to their variable rate products. If you decide to set your payments to reflect a higher interest rate, the difference between the two payments goes directly to your principle each month. Which can save you YEARS off the amortization of your mortgage.

young says:

@Rhea- Yes, definitely. Our bank allows for “double up payments” or up to 20% annually of prepayment.

Richard says:

I think it really depends what your monthly income is in relation to your potential monthly mortgage payments.

If your income is high, then the variable option may be worth the risk. If you are borrowing on the cusp of what you can afford, and will only just be able to make the payments anyway, (like most people) then an increase in interest rate could potentially be a disaster.

In that instance, the fixed rate would be more sensible. At least you know what you’ll be paying no matter what happens to the market.

Writing down stuff definitely is key. Worth doing for one week and seeing what happens. It’s tough b/c nobody can keep up with it.

How’s the rental property hunting going? That’s exciting stuff, and would be a fun read!

.-= Financial Samurai

Yeah, I think its a tougher choice than many realize given all the reasons you have mentioned and more. If I had the choice, I’d go fixed rate as long as the rate was moderately low – say around 4%. Yes, you will pay a bit more in interest, but you can make that up in small lump-sum mortgage payments. The reason I would choose fixed over variable, is I too would like to sleep better at night and I feel I have enough going on watching the markets, picking stocks, making transfers to RRSPs and TFSAs and running DRIPs as well, to add something else to the mix.

Besides, as our biggest expense, I prefer to build my budget around that.

That said, the argument changes when fixed rates are much higher than prime + X%. Like I wrote in an earlier post, its frustrating to hear “experts” and BoC say…get ready everyone…the rates are going up from historical lows. How long can the song be sung? Well, this tune is still playing after we locked into our 5-year term almost three years ago. Can’t win ’em all! Ugh.
.-= Financial Cents

young says:

@Beating The Index: Paying off the mortgage in the next five years? =) I don’t think thats possible in Vancouver it seems.. unless you have money coming out of your butt =) I think the plan of getting a variable and paying it off like a fixed is a good strategy… it’ll decrease your principle for when the interest rates go up.

@Financial Cents: I know what you mean re: worrying about stocks, RRSPs TFSAs and DRIPs! personal finance has so much stuff to think about. Rates are going up, up, up! I’m hoping that BoC doesn’t raise the variable rate until at least July like they promised. Congrats on fixing three years ago- hope you got a good rate =)

I think it all depends on your plan. If you plan on paying your mortgage off in the next 5 years, keep your rate variable and you will be rewarded with thousands of dollars in interest savings plus the taxes you would have paid on that interest!

This is what has been going through my mind for the past few weeks as well… variable, or fixed? With fixed you DO get some peace of mind, but it also seems like such a ripoff if in the end the rates don’t go up that much after all.

The big dilemma right now is that everyone *knows* that rates are going to be going up… so fear is driving a lot of decisions right now. We’ll see in 2 years if a lot of people will end up paying the price for that fear!
.-= Invest It Wisely

young says:

@Invest it Wisely Me too! haha I think a lot of people are thinking about this =( Yup- it’s all this fear mongering!! Today RBC increased the rates AGAIN in a span of 2 weeks. Everyone’s getting all anxious. It’d be interesting to look back to see what happens in two years, yes…!