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Fixed vs. Variable

The decision to choose fixed rate or variable rate is not the same for everyone. The major considerations of the decision are:

  1. Tolerance for Risk
  2. Financial strength
  3. Future considerations
  4. Economic Outlook
  5. Projections on rates

1) What is the tolerance to risk and the desire for certainty?

Variable rate mortgages payments might very well change during the term. For some people, it would be very difficult to sleep at night with a notification from their mortgage lender that their mortgage payment has increased again.

Fixed rate mortgages provide “peace of mind”. It allows the mortgagor to set the payment and almost forget about it.  Therefore, it makes budgeting easier because the payment will be the same each time for the remaining term of the mortgage.  First time home buyers often prefer this as they navigate through first years of home ownership.

2) What is the financial ability to fend off rate an increase to the mortgage payment? 

For some people, their ability service their debts are quite good because they make a great income and have very few debts outstanding.  This doesn’t mean they sleep well at night but it does mean they can fend off increases well and take a greater risk.

3) What are the future considerations?

Some households have or certain plans for the future which may make either mortgage more advantageous.  For example, a couple that is planning to move into a bigger home with a big mortgage in 2 years should probably take a mortgage product that allows them to the ability to blend the existing terms into the new mortgage.

4) What is the economic outlook?

One thing my education has taught me is that no matter what anyone tells you, you cannot accurate predict the rates.  The famously self-proclaimed always right expert, Kevin O’Leary, stated in 2012 that variable rate mortgage holders would be “slaughtered”.  Definitely not the case!
However, the Bank of Canada does publish its outlook with clear messages on how they see the economy and the overnight rate to project.  It often has valuable nuggets in it that can give comfort to the mid-term economic outlook.

5) What do the projections say?

We know that empirically speaking, variable rates have proven to cost less interest over time.  However, using some reasonable assumptions on the prime rate, what does the bottom line savings say?  Is it material and meaningful to you?  Is it worth the risk?

 

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