Many Canadians insist on fixed rate mortgages, worried that interest rates will head higher. But this has proven to be a poor strategy over time.
One look at interest rates over the past 30 years and it’s easy to spot the trend. Rates have consistently headed lower since peaking in the early 1980s. This has made variable rates the better choice.
Plus, variable rates are usually cheaper than fixed. Five-year variable rates under 2% are available through select mortgage brokers, although most lenders are offering them at a little more than 2%. Five-year fixed rates are closer to 2.5% or 3%, depending on the lender.
Say a borrower locked in a variable rate of 2% versus a fixed rate of 2.5%. Rates would have to go up at least twice in a five-year term for the fixed rate loan to even contend with the floating option. The variable rate would have to go up three different times to be more expensive.
Say rates stay steady for two more years, and then go up 0.25% each year for the last three. By year five, the variable rate loan would be more expensive. But the borrower would still be ahead because years one to three were cheaper.
Nobody really knows where mortgage rates will go. Thus, most smart mortgage people will say the same thing. It’s better to take cheaper variable rates today rather than protecting against rate hikes in the future that may or may not happen.
