Variable or Fixed Mortgage? What is right for you?

This is not an easy decision to make, but one you’ll need to carefully reflect on as a homeowner. The right choice lies within your specific situation: the stability of your job, the amount of equity in your home, your financial goals and your level of tolerance for risk among other considerations.

Fixed rate mortgages offer stability with a rate that is locked in for the term of the mortgage — only if rates fall, you won’t be able to take advantage of the lower rates without paying a penalty for refinancing.

Variable rate mortgages offer you savings over fixed rate mortgages with the ability to have more of your payment applied to your interest if rates go down, thus paying the mortgage off sooner. Also, you have the option to convert to a fixed rate mortgage at any time. However, there is always a risk that rates may increase. So not a good option if you are prone to worrying.

But, if you are tolerant of risk, and willing to take a bit of chance then a variable rate may be the right choice for you. Some convincing evidence lies in the report “Mortgage Financing 2007: What Now?” By: Moshe A. Milevsky & Brandon Walker, Schulich School of Business and the IFID Centre.

Key points:

Based on data collected from 1950-2006

  1. Canadians who can accurately predict the next move of the Bank of Canada – and decide to “lock in” their mortgage when the short rate is about to increase – are worse off on average, compared to those who float over the entire interest rate cycle.
  2. Canadians were better off almost 90% of the time with a variable rate mortgage instead of the traditional 5-year rate mortgage.
  3. Canadians still pay a premium for the security of a 5 year fixed rate mortgage

View the full report here

SMP’s mortgage coordinators can provide you with the information you need to make the decision that’s right for you.  Apply for a mortgage today.

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