Fixed vs Variable Rate

“Fixed vs Variable – What should I choose?” Jennifer Rossides, accredited Mortgage Broker will try and shine some light on this question and offer her personal view on the matter.  Spoiler alert…Variable wins. It wins all the time…period.

The debate between Fixed vs Variable is centered around 2 bets you must make when purchasing a mortgage. They are the Interest Expense and Penalty Exposure every mortgage type carries.  It is important to note that Variable Rates have approximately a 1% discount advantage over  5-year Fixed Rate. Jennifer Rossides also suggests that you set your repayments based on the fixed rate amount.

Bet #1 Interest Expense.  If you are looking at the 5-year fixed rate you are placing a bet that this rate will be cheaper for you than a variable rate in a rising interest rate environment. In other words, you will pay less money towards interest over the life of the mortgage.  To hedge against this bet, remember always set your variable mortgage with a repayment based on the fixed rate. With the 1% difference between the 2 rates, you have created a buffer for the next 4 quarter base interest rate hikes. Typically, the Bank of Canada raises by 0.25% incremental raises.  

Now if the Bank of Canada raises the rates 4 times, you haven’t lost the bet…You have been saving money all the way along whereas the fixed rate person has not. In other words, the Bank of Canada needs to raise rates more than 8 times before you start losing this bet…think about it.  When the rates go up past the 1% difference, you are only giving back the money you earned or saved. In this first bet you are saying that for the Fixed Rate to win over the Variable, the Bank of Canada will move rates up more than 2% over the next 5 years. That is a huge overall rate increase in a relatively short period. Which brings us to Bet #2.

Bet #2 Penalty Exposure.  This side bet you make is unfortunately a bet you make without knowing that you made it.  In a 5-year Fixed Rate mortgage, the penalty math is approximately 4.5% of the balance of the mortgage. This is common with all banking institutions in Canada.  And here come some sad statistics.  The average new mortgage amount in Canada is $280,000 and.

Six out of Ten Canadians will break their mortgage due to divorce, job relocation, outgrowing their old house, refinance etc.

That equates to $12,600 in penalty exposure when you take the Fixed Rate bet.  The Variable Rate penalty exposure in comparison is 0.5% or $1,400, a difference of $11,200. The fixed rate choice carries a 900% or 9 times the risk exposure over the Variable Rate option! The fear of a rising Interest Rate environment, coupled with the lack of knowledge of the penalty exposure, is why most Canadians make the wrong choice.  Don’t bet that you will be in the 4 out of 10 that will not break their mortgage and don’t place an additional $11,200 on that bet.

All your questions regarding Fixed vs Variable can be answered with the help of a qualified Ottawa mortgage broker.  
Please give Jennifer Rossides a call at 613-867-8076 or send Jennifer Rossides an email at jenr@lendinghand.ca Start today to find a Smart Mortgage Solution that’s right for you.

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