Like “what came first, the chicken or the egg”, the debate on “variable vs fixed rate mortgage” will too, continue to withstand the test of time.
That’s because there are arguments to be made on both sides and “which one is better” depends entirely on the perspective of the individual and their specific circumstances. Having said that there are a few things we can look at to help everyone assess both options to help make the decision easier:
The “current spread”
Typically, the published variable rate mortgage offers tend to be lower than their fixed counterparts at any given time. You should probably take into consideration the spread between the two options because it may weigh into whether it’s worth choosing one over the other. For example, if the variable rate mortgage works out to be 1% less than the in-market fixed rate, you might find yourself leaning towards the variable option. On the other hand, if the variable rate is only 10 basis points less than the in-market fixed rate, you might not feel like it’s worth the potential fluctuations that come with the variable options. At the time of writing this piece, the spread between variable and fixed mortgages is very small.
Bank of Canada & Bond Yields
The mortgage prime rate (variable) is directly tied to the Bank of Canada’s key interest rate, while the 5-year fixed rates are tied to the 5-year government bond yields. Without getting too deep into the woods in each topic, it’s important to peek into the trends that exist for both… If the bank of Canada is holding a stable position on their monetary policy or they are communicating a “directional” message in terms of where they are heading concerning rates, you can then use this information in making your decision on the type of mortgage that is right for you. For example, at the time of writing this piece, the bank of Canada is concerned about high inflation, and they are communicating that they will counter this by increasing their rates until they can get inflation down to a modest level. If we unpack this message, we can certainly determine that variable rates will likely continue to go up, at least in the near term.
Affordability/Debt Servicing
One simple rule of thumb I like to communicate with our clients is that if your mortgage is at your maximum affordability, then fixed rates are the safe way to go. The idea is that if you’re at your debt servicing threshold, any further pressure on your cash flow by unfavorable fluctuations in the variable rate could cause you to be in a financial bind. On the other hand, if you happen to have a decent cushion in your debt servicing thresholds and cash flow is a non-issue, then you are more financially tolerant to any fluctuations that may come.
Peace of mind
At the end of the day, we are all built differently and sometimes it just boils down to “peace of mind”. You might find that everything discussed above will point you to variable-rate mortgages. but because you prefer stability, you are only comfortable with fixed-rate mortgages. If this best describes you, then that’s okay. At the end of the day, whether it’s fixed or variable mortgages, there is no wrong answer. The right choice depends on the person, their current circumstances, and the state of the market. You might find yourself bouncing between the two options over the lifetime of the mortgage because of how circumstances and people evolve in their lives, throughout time.
Still unsure? That’s okay, give us a call and we can talk it out with you. (905) 455-5005.