Variable or Fixed - Common Questions


With the recent Bank of Canada announcement we’ve been getting a lot of questions lately from people who are trying to time the interest rate market. Sigh.

Folks, I have to tell you, in the time we’ve been in business I’ve never seen anyone successfully time interest rates becuase of skill. Luck sometimes…but never skill. The reality is that you have no control over interest rates and very little ability, if any, to predict where they’re going to go. There are a few things you should know, however, about the relationship between fixed rates and variable rates.

These are some common questions we get and the answers that we would give you:

Q: Should I wait to see if fixed rates are going to go down now that the Bank of Canada has dropped rates?
A: No. Fixed rates move in ADVANCE of changes to the Bank of Canada’s rates because they’re based on bond yields. The market has already priced the discount into fixed rates. It’s a far more efficient system than a bureaucrat in Ottawa. (continued)

We’ve had fixed rates coming down for three weeks in advance of this ruling. If fixed rates start to go up, you can bet that the Bank of Canada will raise it’s rates too.

Q: Should I take a variable rate or adjustable rate mortgage in case Prime goes down again?
A:In some circumstances this could be a good move. However, the current market would indicate otherwise. Here’s why: there are some indications that Prime could go down again – a small amount – but realistically the Bank of Canada’s rate is at it’s lowest point since 1958! The odds are that it will go up before too long. It also cannot go much lower without creating other problems in the economy. The main point is that timing the market is dangerous and usually expensive. Fixed rates are historically VERY low right now and we think that they are the more prudent choice in times of economic uncertainty. Also, at Prime +.6% we don’t think that the premium on variables / adjustables is a good deal right now.

Q: Should I take a variable or adjustable rate mortgage now and just “lock in” when Prime starts to go up?
A: It’s important to remind you that ‘locking in’ doesn’t mean you can lock-in at the variable rate. When you “lock-in” you’re essentially converting your variable or adjustable rate into a fixed rate – at whatever the current fixed rate is. As we know from above, fixed rates adjust prior to variables. By the time you see a variable rate go up, the fixed rate already has. By locking in you’ve just destroyed your interest rate advantage and the entire purpose of being in a variable rate to begin with (i.e. long-term savings) and locked-in to a higher fixed rate than you could have had when you first got the mortgage. Either way it’s a bad deal. Kind of like buying high and selling low. This is why timing the interest-rate market is so dangerous and expensive.

I hope this helps you when you’re trying to decide on what mortgage product to choose this winter. With fixed rates at a very low point historically and the discount (in this case, premium) vs. Prime that variable rates are at, our recommendation would be to choose a fixed rate. If you take a variable or adjustable right now, be prepared to call us back in six months to a year to refinance and get a better deal – but don’t forget those lender penalties!

All for now…

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