Variable rate mortgages have been widely available in Canada since the 1990s. A report released in 2001 states that historically, variable rate mortgages at prime have benefited borrowers 88.6% of the time over the fixed rate. Obviously borrowers who have rates of less than prime are even better off.
This historical savings is the risk premium; the return in excess of the risk-free rate of return, which is the fixed rate.
However, if you’re looking for a mortgage right now, it may be one of those few time periods where a fixed rate may be a better deal than a variable rate. The best variable rates right now are prime+0.4%, this works out to 2.9%. The fixed rate on a 5 year term can be as low as 4.15%.
That means today you would save 1.25% with a variable rate. However, there is not much room for rates to go any lower and Desjardins predicted that rates will stay low until mid-2010 and then over the next 2 years rise 4.50%. That would mean that 3 years from now your variable rate mortgage would be at 7.4%, 3.25% higher than the fixed rate.
Will this happen? Not necessarily, it’s just one prediction. But that’s the risk you take with a variable rate mortgage.
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I agree that this is a big consideration. Predictions over that time period aren’t worth much, but rates can go up 5% a lot more easily than they can go down 5%.
I don’t know if the fact that variable rates are now set to be higher than prime rates makes a difference – by the time they come down again the interest rates might have already gone up – but that’s another issue. Even if rates do go up, geting a mortgage now could add 1% to your interest rate for the whole term.
It’s great reading this information from other countries around the world. All the trends seem to be going a similar way in many countries including Australia. Thanks for the post.
Right now I have to think fixed rates are the instinctive choice. They’re below 5% and haven’t been this low since the 1930s!
Now would be the time to lock these rates in.
The reason people have benefited from ARMs in the majority of cases is that rates have been falling for the past 25 years. A reversal of the trend- a 10 or 20 year trend toward rising rates – would put holders of ARMs in the worst possible position.
When I got into the mortgage business, people were taking ARMs as relief from rates above 15%. Why would anyone do that with fixed rates below 5%??? (???)
Kevin@OutOfYourRut´s last blog ..Buying vs Renting a Home – Its Not All About Money
I’m currently looking to buy a home and have decided to go with a 10 year fixed @ 5.45. I’ve figured that with the early payment options I can have it paid off in full within 8 years anyway. To lock in such a low rate gives me security for a decade should I get laid off again. When applying they try to push a 6 month convertible on you. It’s obviously a trap as I know as well as they do that 6 months from now interest rates will be on the rise. Alarm bells rang because of the tenacity with which they were selling this 6 month variable to 5 year fixed option.
Chris,
It will certainly be interesting to see what the rates do in the future, only then will we know for sure if we both made the right choice. My guess is that we did!
especially in these financial times it is a good idea to research what banks are offering and find the best fixed rate mortgage with the lowest interest rate. If you are unsure about some of the procedures with the mortgage re-payments talk to a independent advisor or find out more information on this site.
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I understand and agree with the info above. But right now I am looking for advice about if or when I should switch from the variable rate mortgage I already have to a fixed rate. We bought the house just under 2 years ago. The variable rate is prime minus .25%, so right now our interest rate is 1.9. What was originally set up as a 40-year mortgage now has less than 20 years remaining. But if interest rates go up again, the remaining time on the mortgage will increase, and depending how high they go, the payment may need to be increased to compensate. Common sense says interest rates will not go lower. My question is, if we are still benefitting from the lower, variable rate, how much higher should I let them go before we lock in??