With fixed rates rising to around 3.5% for 5yr terms, and variable rate discounts getting better, (best rate Prime -.45%, many lenders around the Prime – .3 – .4% range) many of our clients who don’t have pre-approvals for 5yr fixed rates around 3% are going to be considering a variable rate for their next mortgage.
But how do you decide? There are so many factors to consider, like when the Prime rate will move, how quickly it will move, mortgage penalties, etc. Here’s a quick breakdown of some of the things that will make the decision a little bit easier.
Reasons to go short term (Variable or terms <4 years):
- You might be selling the property before a longer term would expire
- You think that interest rates will drop or stay the same
- You plan on increasing your payments and decreasing the amortization quickly.
- You really want a variable rate but aren’t happy with the current variable rate discounts (currently best variable is Prime – .45% which is 2.55%) and believe they will get better (to Prime -.75% or better as it has been in the past)
- You only need to borrow the funds for a short period of time
- You may be coming into a windfall like an inheritance in the near future
- If an investment property, it will still cashflow even if rates rise significantly
- Variable rates have traditionally out-performed fixed rates
- You are a risk taker
You want to be more flexible than the typical 15% – 20% you are allowed to pre-pay on your mortgage balance
Reasons to go long term (4+ years fixed)
- You expect to be keeping the property for an extended period of time
- You plan on being on a long amortization for an extended period of time.
- You want to protect the cashflow of an investment for an extended period of time. The average home price in Canada has historically always been higher over a 10 year period since the 1950’s, so guaranteeing the cashflow can nearly guarantee the returns
- After 5 years of being in a fixed rate in Canada the maximum penalty is a 3 month interest penalty, so you can break it inexpensively (very relevant when considering 10yr fixed terms)
- You believe rates will rise during the term
- You will lose sleep if mortgage rates are moving up
- You are not a risk taker
We also have a fixed vs variable calculator as well, so you can plot how much the variable rate moves up every 6 months to compare fixed and variable as well. Send me an e-mail if you would like a copy by clicking here.
Final Thoughts: Nobody has a crystal ball, but you can help make your decision by answering some of the above questions. We believe that the interest paid between fixed and variable over the next 5 years will be very close, so it comes down to making the right choice based on what is right for you.
Kyle Green is our mortgage expert, you can reach him through his website www.kylegreen.ca