Hamlet once asked, “To be or not to be?” That is no longer today’s question. Nowadays, we are plagued by a different query. It is better to go with a fixed rate or a variable rate mortgage? We need to know how beneficial it would be to lock into a longer-term fixed mortgage rate or stay in a variable rate. Short term rates are at a tremendous low and the pressure is on for rates to build in the coming years. So, what’ll it be? Fixed or variable; which is the better option?
Generally borrowers save money by staying in variable products and weathering the storm of fluctuating rates. Since 1975, approximately 80% of the time, the cost effective route for borrowers was to stay variable. The spread between 5 year fixed mortgage rates and variable rates has been widening further in recent years. It is now close to an all time high.
There are four important points to consider before we jump to any conclusions in thinking the variable rate is the way to go.
- We have been locked in a long-term declining rate environment since the early 1980’s.
- The Bank of Canada’s overnight rate is now as low as it can possibly be. There is no further downside for variable rates.
- Posted rates do not tell the whole story. The actual rates that borrowers negotiate have fallen much closer to fixed and floating in recent years than suggested by headline figures.
- During the late 1970’s and the late 1980’s, fixed rates were advantageous (ahead of a period of rising interest rates, as is the case now).