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29 Oct

The Great Debate: Fixed vs Variable what shall you do?


Posted by: David Sahibzada

Should I take a fixed vs variable rate is the second most common question I get asked. The first being “what’s the best rate I can get?”(Which is a terrible question to ask but that’s a conversation for another day). Asking the fixed vs variable question is even a more popular question when we are in a rising interest rate environment as we are in right now. Here’s what I can tell you.

Relying on economists for answers is a tried and true way to discover what’s going to happen in the next month or two after that their crystal ball is as dark as mine! Knowing that variable rates go up and down as the Prime rate goes up and down is somewhat helpful but once again it involves guessing if the bank of Canada will raise rates. I can actually guarantee they will raise rates and I can guarantee they will also drop them I can’t guarantee when or how often that will occur. I’m kinda like an economist in that way.

So what good am I? Well that’s a bit harsh of you to be asking but I get it, deciding which way to go can be frustrating. Here is what I can tell you:
– In about 88% of cases someone with a variable rate ends up paying less interest over their 5 year term than someone with a fixed rate.
– Most Variable rate mortgages have penalties equal to a 3 month interest penalty. As an example a $400,000 mortgage with a 3.59% rate and 25 year amortization would have a penalty of roughly $3,500
– Most fixed rates will have penalties that can be 3-5 times larger than an equivalent variable rate. So at $400,000 the penalty could be anywhere from $10,000 to $17,000 or more. For a quick estimate use 4% x balance to ball park it. As each lender calculates penalties the best way to find your penalty is to call and ask!
-Lastly we know that the average 5 year mortgage lasts approximately 3 1/2 years. People have to get out for a variety of reasons. moving, divorce, bigger home, job loss, refinance, etc. Whatever the reason many people break their mortgage and are subject to penalties. Life happens!

What this means is the odds are overwhelmingly in favor that a person taking a variable rate will pay less in interest/penalties than a person who takes a fixed rate. Meaning when you take a fixed rate you are in fact making the riskier choice!

This means that you should all be taking variable rates right? Whoa don’t be so hasty! While yes in most cases it’s the best way to go there is one big exception… If you are constantly worried about rate increases and if what the Bank of Canada is or is not going to do is keeping you up at night then a Variable rate is not for you! It doesn’t matter how good the argument or sound the stats are, if it stresses you out it’s not worth doing.

So I give you permission to listen to all the economists you want and watch all of the disturbing news regarding rate increases and chart the Bank of Canada rate and have your financial planner tell you all about the bond the rate, and you may even listen to your wise friends brothers father-in-law’s advice as long as you agree to ignore everything they say and go with a variable rate anyway. Well most of the time…