Should you go variable or fixed?
Kerri-Lynn is the Community Manager for RateHub.ca, a site that compares Canadian mortgage rates.
It is an in interesting time to pick a mortgage rate for your condo. Rates are near historical lows and the spread between variable and fixed mortgage rates is also abnormally low. In the past, variable rates have proven to be less expensive – BMO recently reported the last time fixed rates held advantage over variable rates was in the late 1980s – but this may be one of those times in history when choosing a fixed mortgage rate will mean you pay less interest over your mortgage term.
Fixed mortgage rates have a set interest rate and mortgage payment that stay constant over the course of your mortgage term, while variable rates follow the prime interest rate set by the Bank of Canada. This means that variable rates can fluctuate and so can your mortgage payment. Variable rates are priced at a discount or premium to the prime rate and this discount/premium is locked in over your mortgage term. The interesting thing that is happening now with variable rates is that it is not the prime rate that is changing (it hasn’t changed in over a year), but this discount/premium.
The prime rate currently sits at 3.0%. A few months ago, 5-year variable mortgage rates could be found for as low as 2.1% (a -0.9% discount to prime). Now, variable rates are closer to 2.8% and climbing, with some banks even listing them as premiums on prime (3.0%+). At the same time, fixed mortgage rates have fallen, making them more attractive and the spread between the two rates smaller. There is now less than a 0.5% spread. If variable rates rise, which they inevitably will have to, a fixed rate may save you more interest over your mortgage term.
Fixed mortgage rates are a more popular choice amongst Canadians. Most feel more comfortable with the stability of a fixed mortgage payment and are even willing to pay a premium for that assurance. However, now it is unclear whether Canadians will even end up paying a premium.
If you want to test both options, there is always the possibility of going half fixed and half variable too. Not many Canadians take advantage of a hybrid mortgage, but it is a sound option and can limit your exposure to overpaying with a fixed rate or conversely limit the risk of your variable rate rising.
Of course, it is not certain if variable rates have ‘bottomed out’, and given the economic woes of both Europe and the US, Canada could very well cut rates further to simulate our own economy. This would imply a variable rate could once again prevail. However, less this slight possibility, there may not be a better time to go with a fixed mortgage rate!
