• Is a fixed or variable mortgage best for me?

    The above question is by far the number one question us mortgage professionals receive. Or another question is Robert, what would you do if you were me?

    Unfortunately I am not you and my answer may not really help your situation. Here is how we do explain and educate our clients as to the process.

    We have a four step sequence of questions:

    1. Teach the difference between the variable and fixed rates
    2. Assess risk tolerance
    3. Assess clients psychology [may be the most important question]
    4. Breakdown rates and payments as well as personal mortgage situation.

    Step three is big for us. If the clients are going to have fear, anxiety and constant worry, then a variable rate is not the product you should be considering.

    We also help our clients break down the pros and cons of both products.

    Below we outlined some of these important points.

    To start, let’s describe each product:

    • Fixed rate mortgage: depending on the term selected [1 to 10 years], the mortgage rate and payment remain the same or in other words they are fixed.
    • Variable rate: when the bank of Canada changes the primary, your mortgage payment will go higher or lower depending on the rate direction.

    Fixed rate advantages

    • Great for budgeting
    • Brings stability
    • Do not have to worry about economic events

    Fixed rate disadvantages

    • Large mortgage penalties for breaking the mortgage
    • If history is any consideration, you could be leaving a lot of money on the table

    Variable rate advantages

    • Variable rates can be converted to fixed mortgages at no cost
    • Historically have saved mortgage consumers lots of money
    • Only three month interest penalty to break them

    Variable rate disadvantages

    • They have hit bottom during Covid and are most likely to rise
    • Not a great product for a warrior or one to have anxiety

    If you believe in the variable rate, I will describe how I would handle it in this current environment. Do I believe inflation may be a problem and rates could rise? Yes, I do. Since all of our clients are getting approved at 5.25% stress test, I would try to take advantage of the cheaper rate with the variable in the following manner:

    • Mortgage amount equals $400,000
    • 25 year amortization
    • Fixed rate 2.79%
    • Fixed payment monthly equals $1850.15
    • Variable rate [prime -1%]
    • Variable payment monthly equals $1589.55

    Again, if it were me, I would make the payment based on the fixed rate but with a variable rate. In other words, I would pay $1850.15 but with the variable rate. The reason is simple, the extra money in the payments will go on the principle. More importantly, I would have built a lifestyle as if I took the fixed rate well enjoying extra savings. Most importantly I would have built in rate increases.

    In conclusion, whether you decide on a fixed or variable rate in the fall of 2021, no that history is on your side and your rates are still cheap.


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