Chapter 6 – Variable vs Fixed
One of the questions I get asked frequently is whether to choose a fixed product or a variable product. Which route to take ultimately depends on your preferences.
Here are some things to look at when making your decision:
1. Fixed payments vs Fluctuating payments
There is a certain premium that you pay to have a guaranteed payment for a given time period. That’s worth something. One alternative I’ve suggested to clients wishing to go for a variable rate mortgage is to set their payments at a fixed rate. For example, if their variable rate is only 2.5%, they can arrange for their payments to be made as if the mortgage was at a 4% rate. Any extra money goes directly towards paying the principal. If the variable rate eventually rises enough, then you need to increase your payment.
2. Qualification Process
Up until 2018 Conventional Fixed Rate Mortgages have been easier to qualify for because their actual payment is used to qualify and a Variable Rate Mortgage qualified at an artificially high 5 year benchmark rate. With the “Stress Test” now in effect, the qualifying rate for Fixed Rates and Variable Rates are now the same or at least very close. There are still a select few local lenders that are not subject to the “Stress Test” and I can access these lenders if necessary to qualify for the largest possible mortgage.
3. Risk tolerance.
It’s hard for a broker to suggest one type of mortgage over another when it’s completely dependant on the borrower’s risk tolerance. If variable rates went up 2%, how would you feel about that? Would you still be comfortable making those payments?
Bottom line is that both fixed rates and variable rates in Canada are at historic lows. It’s hard to say for sure what will happen in the future, but I will usually go over the above points with my clients before choosing a mortgage type.