Fixed or Variable?

What is Your Best Choice?

When it comes time to purchasing, renewing or refinancing, the age-old question… always comes up;

Do we go fixed or variable?

There can be numerous factors to consider within this one simple question.

The type of rate you opt for is often personal, influenced not only by your financial circumstances but also by your comfort level with the potential ‘risk’ vs. opportunity for ‘savings’.

Additionally, there are situational circumstances like macro-economic trends that may significantly play a role.

What’s The Difference?

A fixed-rate mortgage is straightforward – your interest rate is established at the onset of your term (typically for 5 years, which is the most common duration), and your payments remain unchanged until the renewal period.

Although fixed rates are commonly higher than variable ones (although not always), they offer stability in both interest costs and payments throughout the term. Despite accruing more interest over time, opting for a fixed rate is deemed a safer choice, ensuring a predictable budget over your mortgage term.

A variable rate mortgage means that your interest rate will fluctuate in tandem with changes in the prime rate, consequently impacting your interest expenses and mortgage payments.

Typically provided for a 5-year term, variable rates are frequently (although not always) lower than 5-year fixed rates (inclusive of lender discounts off prime) due to the potential for fluctuations and the accompanying need for budget adjustments, thus adding an element of risk.

Pros and Cons of Each

Fixed Rate Mortgage

THE PROS: Less Stress

Rate is Set for Duration of Term
Payments and Interest won’t change, giving you 100% certainty
If rates increase during your term, you’re protected
Fixed Rate Mortgages are normally portable (can move with you)

THE CONS:

Penalties will be higher if you break your mortgage term (IRD Penalty may apply)
Historically, fixed rates are higher than variable rates. This is situation and does not always apply however.
If rates increase during your term, you’re protected
If rates drop during your term, you may perceive yourself as paying more than is fair.

Variable Rate Mortgage

THE PROS: Usually a Lower Rate

If rates go down, you’ll pay less interest.
Cheapest penalty if you need to break the mortgage (3 month’s interest)
Historically, variable rates have outperformed fixed rates by a measure of total cost of interest
In most cases, you can always convert to a fixed rate mortgage without penalty

THE CONS:

Most variable rate mortgages are not portable.
If interest rates go up, your payments and cost of interest will also increase.
You may feel the need to stress on the economic news cycle

*Update*

While historically fixed rates have been higher than variable rates, we are currently seeing significantly lower fixed rates, which we believe is a temporary situation related to the Bank of Canada’s efforts to control inflation.

A History of Variable Rates

The Chart below shows average 5yr variable mortgage rates, and the Bank of Canada Overnight Lending Rate over time.

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Over the last few years, variable rates have been highly volatile.

You can see from the chart above, wild downward swings in variable rates around the COVID times, and more recently a wild upswing as the Bank of Canada has been in a fierce battle with inflation.

This chart is visual proof that variable rates can have BOTH significant upside and downside.

A History of Fixed Rates

The Chart below shows average 5yr fixed mortgage rates, alongside 5yr bond yields over time.

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Over the last few years, fixed rates have also seen major up and downswings.

The take-away here is that with fixed rates, you would select your mortgage rate at a single point in time, and no longer be impacted by any further volatility.

As an illustrative example, mortgage customers that took fixed rates, or locked in their variable rates in 2020/2021, have so far avoided much of the recent volatility.

Your Ultimate Decision

It’s easy to over-analyze charts, bullet points, and interest calculations. For most people, the choice between fixed and variable rates will come down to the following three questions:

Do you Want to Stress About Your Mortgage?
If not, stick with a fixed rate.

Could you handle a 10-30% increase to your regular payment?
If not, stick with a fixed rate.

Do you plan to sell your property or payout your mortgage in the next 3 years?
If yes, a variable rate may be a good option.

Want more Info? Get Started Now and Talk to SOBO.

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5yr Variable Insured

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Fixed or Variable?

What is Your Best Choice?

When it comes time to purchasing, renewing or refinancing, the age-old question… always comes up;

Do we go fixed or variable?

What’s The Difference?

Pros and Cons of Each

Fixed Rate Mortgage

THE PROS: Less Stress

Rate is Set for Duration of Term

Payments and Interest won’t change, giving you 100% certainty

If rates increase during your term, you’re protected

Fixed Rate Mortgages are normally portable (can move with you)

THE CONS:

Penalties will be higher if you break your mortgage term (IRD Penalty may apply)

Historically, fixed rates are higher than variable rates. This is situation and does not always apply however.

If rates increase during your term, you’re protected

If rates drop during your term, you may perceive yourself as paying more than is fair.

Variable Rate Mortgage

THE PROS: Usually a Lower Rate

If rates go down, you’ll pay less interest.

Cheapest penalty if you need to break the mortgage (3 month’s interest)

Historically, variable rates have outperformed fixed rates by a measure of total cost of interest

In most cases, you can always convert to a fixed rate mortgage without penalty

THE CONS:

Most variable rate mortgages are not portable.

If interest rates go up, your payments and cost of interest will also increase.

You may feel the need to stress on the economic news cycle

A History of Variable Rates

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A History of Fixed Rates

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Your Ultimate Decision

Want more Info? Get Started Now and Talk to SOBO.

5yr Fixed Insured

5yr Variable Insured

Keep Learning

How Do Bond Yields Impact Fixed Rates?

Common Mortgage Questions

Renewing Your Mortgage: The Basics

Mortgage vs Credit Line

Fixed or Variable?

What is Your Best Choice?

When it comes time to purchasing, renewing or refinancing, the age-old question… always comes up;

Do we go fixed or variable?

What’s The Difference?

Pros and Cons of Each

THE PROS: Less Stress

Rate is Set for Duration of Term

Payments and Interest won’t change, giving you 100% certainty

If rates increase during your term, you’re protected

Fixed Rate Mortgages are normally portable (can move with you)

THE CONS:

Penalties will be higher if you break your mortgage term (IRD Penalty may apply)

Historically, fixed rates are higher than variable rates. This is situation and does not always apply however.

If rates increase during your term, you’re protected

If rates drop during your term, you may perceive yourself as paying more than is fair.

THE PROS: Usually a Lower Rate

If rates go down, you’ll pay less interest.

Cheapest penalty if you need to break the mortgage (3 month’s interest)

Historically, variable rates have outperformed fixed rates by a measure of total cost of interest

In most cases, you can always convert to a fixed rate mortgage without penalty

THE CONS:

Most variable rate mortgages are not portable.

If interest rates go up, your payments and cost of interest will also increase.

You may feel the need to stress on the economic news cycle

A History of Variable Rates

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ZOOM IN/OUT ABOVE

A History of Fixed Rates

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ZOOM IN/OUT ABOVE

Your Ultimate Decision

Want more Info? Get Started Now and Talk to SOBO.

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5yr Fixed Insured

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5yr Variable Insured

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