Fixed or variable

FIXED OR VARIABLE? This is a question that comes up increasingly in conversations with new or existing homeowners. My answer is always that it depends on their circumstances. There are 4 main factors to consider:

1. What is my risk tolerance? If you don’t like to take risk and want the sure thing, fixed rates offer you the comfort and security of knowing your payments for the next 3-10 years. Sometimes I refer to this as the sleep factor, does it keep me awake at night, if it does consider a fixed rate.

2. What is my current debt load? If you have tight cash flow and are concerned where you might be able to squeeze out more money for higher payments, you may want to consider a fixed rate. The other factor that can affect your debt load is job loss, reduced income, adding children to your family plus other factors. The opposite can be true if you are well educated and the prospects for your career and profession has a good future. Variable rate mortgages can save you money now if you are in this situation.

3. Do I know what is happening with rates? If you read the business section of the paper daily chances are that you know what is going on with interest rates. If you have a mortgage broker that communicates with you regularly, you have the advantage of being on top of this. I provide regular emails with rate updates and Bank of Canada announcements to keep consumers informed. Ultimately, it is their decision if and when they decide to lock in if they so choose.

4.  Consumers with equity in their home may feel more comfortable in choosing a variable rate mortgage.  If you have less equity and you get caught with rates increasing, you may end up with less equity.  This will be explained in a later post.

If you have been in a variable rate mortgage over the last century, you have fared better than someone in a fixed rate mortgage with your savings in interest. At some point this economic cycle will end and those with fixed rates below 5% will be seen and having made a good decision. The question is when is this time. In the investment world, market timing has never been viewed as a strategy to live by, the same is true in mortgages. If you wish to receive rate updates regularly, please let me know.