Variable rate and fixed rate mortgages both have their advantages and disadvantages. Historically homeowners tend to pay lower rates with variable mortgages, but these mortgages are also vulnerable to fluctuations because they are tied to the Bank of Canada’s prime lending rate where fixed rates are consistent throughout the term of the mortgage. Currently a variable rate mortgage is approximately .60% lower than the best 5 year fixed rates with the Bank of Canada prime lending rate set at 3.00%.
Interest Rate Forecast
The Bank of Canada has said they have no intention of increasing rates until 2015 and bond rates have remained low. When they decide to start increasing rates it will be very slowly as to monitor the effects on the Canadian real estate markets. If they increase rates too quickly they risk crashing the real estate market across Canada. It is expected increases will come a quarter percent at a time pending the financial stability of our economy.
What is the best choice?
There is no correct answer, the product you choose must be the one that fits your needs and comfort level. A variable rate product will be lower today but there is no guarantee it will be lower a year from now. If you are the type of person that can’t sleep at night knowing that your rate may change by 0.25%, then a variable rate mortgage is not the best option for you. If your budget is stretched to its limits and any increase will make your payments difficult to pay, then this is not the best choice. A variable rate mortgage is appropriate for individuals who are financially very comfortable and willing to risk future rate increases by taking the lowest possible rate today.
Convert a Variable to Fixed?
Variable rate products typically allow you to lock into a fixed term of equal or greater length at any time during your term. While this does eliminate some of the risk of a variable rate it does mean you need to time the rate changes perfectly and securing today’s best rate is unlikely when rates start to rise as you are limited to choosing a fixed rate that is available at that time. In most cases fixed rates will begin to rise with bond rates in anticipation of the Bank of Canada increasing their rates.