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Fixed, Variable, or Both?

Variable-or-fixed-mortgageWho can be blamed for thinking mortgage rates will stay in the basement for the foreseeable future? We’re witnessing:

That has many wondering why on earth anyone would take a fixed mortgage rate.

Indeed, noted CIBC economist Benjamin Tal says: “We know the five-year (fixed) rate is attractive, but we also know short-term rates are not raising.”

Despite the economic negatives, however, the rate choice is not clear cut. Prime rate could theoretically remain as-is for a year and a half (i.e., until near the expiry of the Fed’s conditional pledge) and then jump 150+ basis points. In that scenario, a four-year fixed near 3% could cost less than a variable over four years, other things being equal.

In the end, most people’s fixed/variable decision boils down to how much they want to pay (or need to pay) a lender for borrowing cost certainty.

Variable rates are roughly prime – 0.70% on the street at the moment. That’s 69-79 bps cheaper than a good 4-year fixed (arguably the best fixed term at the moment). At the outset, that variable rate would save you $37/month per $100,000 of mortgage.

mortgage-riskYour financial breathing room will largely determine if this upfront savings is enough to gamble that rates stay low after 18 months or so. If you don’t want to bet all your chips you can always consider a hybrid (i.e., a mortgage split into fixed-rate and variable-rate portions).

Professor Moshe Milevsky, Canada’s best known mortgage researcher, recently told FP: “I still don’t get why more Canadians don’t split their mortgage.”

Milevsky is a noted proponent of hybrid mortgages, for two reasons: 1) people have no clue where rates will go; and, 2) rate diversification offers the same benefits as investment diversification.

If you’re interested in a hybrid, the most competitive nationally-available hybrids in Canada are currently from Merix Financial, National Bank, RBC, and Scotiabank.

Rob McLister, CMT