I’ve heard it said over the years by many customers or potential customers that they want the best rate from me. If you look at this chart, you will see that historically the best rate is going with the variable rate. Even with the ups and downs it is much less volatile then randomly picking a fixed rate. What if you pick the fixed rate on the wrong day? You are stuck with that rate for 5 years! I am not an expert on why the fixed rate changes so much, but the variable rate can only change 4 times per year, when the bank of Canada meets to discuss if they will change the “prime” lending rate. Look at the chart I have attached here. The blue is the variable. It is almost always lower!
Also did you know that if you break a variable rate mortgage, you will only pay the bank 3 months of interest? If you break a fixed rate mortgage the bank has this ugly thing they call the Interest Rate Differential (IRD). Again I am not an expert on the “IRD”, but it has something to do with the bank re-cooping the lost money they have to pay out to a customer that they have borrowed the money from in the form of a GIC, that they lent to you in a mortgage.
A perfect example is a young man I met with recently; if he were in a variable rate mortgage, his penalty to get out of his mortgage would have only been $2400. Because he is in a 5 year fixed, to break his mortgage he will have to pay the bank $10,500!
Someone once told me that the average 5 year mortgage only lasts 2.5 years…people move up or down, there is a death, a marriage, a divorce…etc. And I have been doing this for 9 years now, and I have people on average coming back to me every 2-3 years. Why pay the bank more than you have to? I have done hundreds of mortgages over the years and my clients that took the variable rate, and have stuck it out are happy. Now of course they may all call me as rates go up in the future complaining!
People are also asking should I lock in now since rates are so low? Maybe or maybe not. Do you want the peace of mind knowing that your payment is fixed? If you do, then take the variable rate, increase your payment to what it would have been on a fixed rate, and as the rates go up or down your payment won’t change, only the amortization… People only look at the ups of the variable rate. Never the huge down swings. Remember where you were September 11th 2001 or October 2008? Those were major life changing events, September 11th, and in October 2008 the US ’s banking system nearly collapsed! The experts make a living out of telling people rates are going up. What about when they go down? I hope and pray we don’t ever see another September 11th or October 2008. If they do happen again, watch the variable rate. It will fall like a stone. Maybe never back to these current rates. But it will go down. History has a tendency of repeating itself…Rates will go up and down.
Something to think about! Call with questions!
So who wants the best rate?
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