Choosing Your Mortgage: Fixed Or Variable Rate?

March 10, 2009

Fixed Or Variable Rate Mortgage?

Bargain basement borrowing costs are prompting many Canadians to opt for fixed mortgages even though variable products continue to be a money-winning option for the foreseeable future, industry observers say.

Currently, the Bank of Canada’s trend-setting overnight rate is at 0.5 per cent, and Canadian Banks’ prime rate is at 2.5%.

Canadian Imperial Bank of Commerce’s chief economist says variable rate mortgages should produce the greater benefit for the next two to 2.5 years, but be a wash over five years.

“If you’re really risk-averse, jump on those fixed-term rates because they’re extremely cheap,” Benjamin Tal said. “Going variable probably will give you good performance for the next two years or so and beyond that, we might see interest rates rising.” Inflation could ultimately lead to higher interest rates, but likely not before 2011, he said.

Variable rates remain attractive even though banks last fall eliminated discounts and began charging premiums for their variable mortgages.

Homeowners whose mortgages were booked at prime rate with discounts as low as 90 basis points below prime should just stay with their variable mortgages until the end of their terms. They should take this opportunity to pay down their mortgages.

Studies conducted by Mortgage expert Moshe Milevsky of York University have shown that variable rates have historically produced greater savings 88 per cent of the time. “In today’s environment, you’d be hard-pressed to make a case to continue floating,” he said, advocating a blend between fixed and floating rates.

For home owners who prefer the security of fixed mortgages, and owners of rental properties, fixed-rate mortgages may work better as they can better budget their rental income with stable mortgage payment.

Other factors to consider

A home owner should consider other factors in deciding whether to get a fixed or variable mortgage. What kind of mortgage to take should never be made in isolation of individual circumstances such as the amount of equity, value of the house, debts and risk aversion.

In today’s real estate market where home prices are falling, seeking a long-term rate may be more important than the type of rate. There is a real danger that when you want to renew your 1 or 2 years mortgage, you may find that the mortgage on you owe is more than the value of your home.

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