Fixed Vs. Variable Mortgage: A Quick Comparison

Let’s take a look deeper look at the age old question my clients ask….”So, Variable or Fixed?”. First, let’s make some assumptions: 1) You can handle fluctuation in your mortgage payments and you will NOT loose sleep wondering if your rate will sky rocket because your parents keep telling you how they paid double digit interest rates in the 80’s. 2) You qualify for a variable rate with acceptable debt-to-service ratios at the qualifying rate of 5.35% 3) Let’s assume the Bank of Canada will start to raise the overnight rate by 0.25% in July and September of 2015, January and March of 2016, in July and September of 2017, and two more in July and September of 2018.

Here’s a summary of how a $300,000 mortgage at a five-year fixed rate at 3.35% compares to a five-year variable rate at 2.45% (prime minus 0.55%):

A great strategy for variable-rate mortgage borrowers to set their monthly payment at the 5 year fixed rate payment amount. In this case, that would mean their initial monthly variable-rate payment of $1,336 would actually be $1,474. This would equal an extra payment of $138 per month going directly towards their mortgage principal. This allows you to get ‘used to paying a higher rate’ while enjoying the principal pay down. As the variable rate increases throughout the term, you simply adjust the $138 extra payment down so that your total monthly payment remains constant. Here is a summary of the effects when using this strategy on our comparison.

You will notice this strategy does not save you much in interest paid, however your balance after 5 years has lowered substantially…best of all you won’t even notice the extra payment.

Our assumption of the rate increases by the Bank of Canada may be considered aggressive – what if rates do not rise as fast as we assumed?. But, some may rightfully say that this small saving is not worth the risk inherent in the variable rate choice.

Here’s a great tool that I’d like to share. One of our lenders has prepare this Fixed vs Variable Comparison Calculator. Feel free to download and let the numbers speak for themselves.

At the end of the day, you need to know what your risk tolerance is. We can only make an educated guess at what will happen to mortgage rates over the next 5 years. We want you to be comfortable with your mortgage choice however in our comparison, today’s variable rate would be the better option over the next five years … assuming that you can sleep at night.

Mark Kupina | www.KupinaMortgage.com