Variable Vs. Fixed Mortgage Rates - 2009 Edition

If you’ve followed our blog for very long you probably know that we’ve been big fans, at least intellectually, of the variable and adjustable rate mortgage products out there.

Realistically, it’s hard to ignore the widely reported facts from the York University study done by Moshe Milevsky that cemented the variable as a money saver, nine times out of ten over fifty years.

That said, these are unusual times. We always ask the people we’re working with if they can “sleep at night” knowing that their interest rates and payments might go up. Surprisingly, most Canadians choose the fixed rate over the variable – despite the statistical advantage held by floating rates. (Incidentally, this just proves that getting the “best mortgage” doesn’t always mean getting the “best rate”.)

Now, more than ever, you have to ask yourself this question, “Am I happy with a really low fixed rate mortgage for the next five years, or do I want to gamble on a variable?”

There is no easy answer. Our general suggestions sound something like this:

1) If you absolutely want security and “peace of mind” then choose a fixed rate. They’re near their all-time lows and are ridiculously cheap

2) If you can afford a payment shock if rates go up, or have a lower principal balance (i.e. $200k and under) than average, consider the variable. You may save a substantial amount – at least in the short-term. Currently there is about a 2% spread between the lowest variable rates and the five-year fixed. That’s always been a good indicator to consider the variable.

Finally, consider this: If you are sitting on the fence and can’t decide, why not do both? There are two great ways to hedge your bets when it comes to rates:

A) Take a 50/50 mortgage. We have several lenders that offer mortgages that feature fixed AND variable portions. This allows you to diversify your risk – much like you would diversify your portfolio of investments.

B) Take the variable option, but increase your monthly payments to make the same payment you would have paid in a five year fixed. That way there is no payment shock for a long time and the extra cash out of your pocket goes into your other pocket, rather than to the bank in interest. This is one of my favourite strategies and can really turn the tide in your favour.

After you read the following articles, including one featuring Mr. Milevsky, you’ll see why this is a big decision and hopefully have a little more insight into how to make it. If you have any other questions about this issue, please feel free to give us a call.

Can you afford the risk of a variable?