Fixed vs Variable – The Debate Rages On.
As prime rate continues to be kept low by the bank of Canada, the age old debate of Fixed/Variable is again a hot topic.
Let me start by saying there is no right answer! Every person has a different set of needs and risks to factor in when choosing what is right for you (and this is a very important topic to go over with a mortgage professional).
Traditionally, variable rates have ended up saving the consumer money over the term of the mortgage. This is due to a fairly consistent drop in prime rate over the last 15 years. Statistics will show a variable rate may save you money, but we are now at the bottom of the prime rate slide and the unanimous consensus amongst economists is that Prime will inevitably have to start increasing again in our near future. It can’t stay this low forever (as much as we’d like it to).
When this does happen (could be in 6 months, could be in 2 years), the variable rate mortgage you have will then start increasing; if you aren’t expecting it, this is bound to create stress. If you understand this, you may plan to pay your mortgage down ASAP as rates increase, or just weather the storm and hope for a future drop. It also depends on what you’re using your mortgage for. For example, real estate investors may prefer variable rates when they are planning on flipping houses or want smaller potential penalties. Many people are confident that prime rate will stay low long enough that the upfront savings now are worth the potential increase down the road. Maybe it will work out that way; maybe not.
The defense of fixed rates is much more straightforward: If you like the security of knowing your payments for the next term of your mortgage, then this is the way to go. And it doesn’t hurt that our current environment of historically low fixed rates makes this option very attractive.
A Little Bit of Both
One particular strategy that I have used for some clients which can be advantageous is a 2-tiered mortgage, essentially splitting up the mortgage into both fixed and variable portions. Clients looking to pay a portion of their mortgage down in the next year or two put that amount of the mortgage into a variable rate, and then the remainder as a low fixed rate. This is a way to benefit from the lower VRM portion while rates are likely to remain very low, in time to reap the benefits of a secure fixed rate for the remainder of the term. Win/win!