Fixed vs. Variable

I am big proponent of variable rate and here’s why:

Why go variable?

1.)   Statistics, Statistics: BMO says variables have been cheaper 83% of the time

2.)   Lower Penalties: People often break their mortgages early, for various reasons (including refinancing, selling, divorce, moving to a mortgage with a better rate/more flexibility, etc.). Most variables let you escape your contract with a 3-month interest penalty, whereas fixed rates can hit you hard with interest rate differential (IRD)—even if rates stay relatively flat (many people don’t know that).

3.)   Less Rate Risk: Compared to prior economic recoveries, economists believe that it won’t take as many rate hikes to cool Canada’s overleveraged slow-growth economy this time around

4.)   Slower Rate Hikes: The U.S. Fed has pledged to remain on hold till 2013. Moreover, TD says: “The Bank of Canada has repeatedly noted that there are limits to how much Canadian short-term rates can diverge from those in the United States."

5.)   A Free Option: Variables let you lock in anytime for free.(i.e., lock in if rates drop further, or lock in if rates look like they’ll blast off), you can do it for free in VRM…but not in a fixed.

6.)   Fixed Payments: Some lenders let you fix your payments so that they don’t move when prime rate moves.

7.)   Payment Matching: When variable rates are lower than fixed rates, you can increase your variable payments to match a 5-year fixed payment.

8.)   Timing is Futile: The problem is, knowing short-term rates doesn’t help you predict long-term rates, and the majority of mortgages are 3+ years.