Fixed vs. Variable Interest Rates in Canada

The question always seems to be which to choose, especially considering the impending increase of interest rates. Which is more beneficial to you, the borrower, and which will save you more money?

According to Andrew Allentuck’s article in the Financial Post, the decision tends to depend on your access to cash and your risk tolerance. Borrowers with easy access to cash don’t mind taking the chance that their interest rates could increase, whereas others feel pressure to avoid any increase and prefer to stay locked in to a fixed rate. The latter tends to be the case for first time home buyers as they are owing more money and their incomes are usually lower than they will be in the future.

However, consider the study by Milevsky and Walker, to which Allentuck’s article refers, and you may want to reexamine the benefits of maintaining a variable interest rate on your mortgage. If you have the flexibility of having access to cash, a floating interest rate will likely save you money in the long run, depending on the time period. The study revealed an average savings of $20,630 (as of 2008) and allowed borrowers to cut the time it would take them to pay off their mortgage by a year or more.

Speculation continues as the Bank of Canada talks about increasing rates and the Canadian bond yields fluctuate due to the unstable economic situation in Greece. Ultimately, your choice of a fixed or variable interest rate is a decision based on personal preference, the flexibility your finances and savings provide, and what risks you are willing to take while paying off your mortgage.