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Fixed Rates Have Slight Edge, Says Economist

Deeply-discounted variable rates have historically beat out 5-year fixed rates roughly 77% of the time.*

But CIBC economist Benjamin Tal suggests the coming five years may “slightly” favour fixed rates.

He displayed the following chart at the CAAMP Forum on Monday.


(Click picture to enlarge)

It projects that the typical variable-rate mortgage (VRM) will be more expensive over five years than the typical 5-year fixed. That’s based on forward swap rates and a closing date in January 2011, says Tal.

Tal was careful to point out that this isn’t a blanket recommendation of fixed rates; it’s more of a commentary on how narrow the gap has become between fixed and variable mortgages, based on market rate expectations.

Some people will undoubtedly look at this and see no point in assuming the risk of a VRM given the minimal projected cost difference.

Others will remain skeptical, with the belief that North America’s economy isn’t strong enough to spark sustained 3%+ inflation (and the rapid rate increases that would come with it). This minority would rather plow their up-front payment savings back into their VRM for 1-2 years, and take their chances later in their term.

Whatever the case, rates are near the bottom and the market is clearly betting on future hikes. However you look at it, going variable is no longer as clear-cut a strategy as it once was.

In determining what’s best for you, check suitability first. Then have your mortgage professional run some rate simulations. If a 3% increase in prime would stress your cash flow, a VRM is absolutely not worth the risk.

* Based on Moshe Milevsky’s mortgage rate research.

Robert McLister, CMT