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September 2011 ... Bank of Canada holds rates. So which is better, fixed vs variable?

In a dramatic policy shift, the Bank of Canada said on Wednesday (September 8) it saw less need to raise interest rates, and took a more cautious stance about the worsening global economy. The bank held its overnight rate unchanged at 1 percent, where it has been for the past year, and took its previous talk of a rate hike off the table. It appears that borrowing costs will remain lower for a longer period of time – good news for both new homeowners and those renewing mortgages.

Given our 5-year fixed rate is again at historical low levels, which type of mortgage loan is best for you: Fixed or Variable?

When interest rates are extremely low, you should expect variable rates to go up, but when? For this reason, most homebuyers are more comfortable with fixed-rate mortgages that provide a predictable payment amount, particularly for their principal residence. A fixed-rate term is also most suitable for first-time home buyers who try to squeeze into the most house they can afford. On the other hand, statistics over the past 10 years have shown that taking a shorter term or variable-rate mortgage had in some cases been cheaper than taking a 5-year fixed-rate mortgage; especially during an extended low interest rate environment. Smart Money Magazine has an excellent calculator on their website that helps explain the break points; but be warned – a calculator cannot predict market fluctuations. If you decide to choose a variable rate mortgage, be sure your lender provides favourable fixed conversion rates, and work with a mortgage professional who has a plan to monitor and keep you informed of future rate hikes.

If we could predict the future, we’d know how to make the right mortgage choice. In the absence of a crystal ball, however, you’ll want to have a good conversation with an experienced mortgage planner who can help you assess your own situation. With access to more than 50 lenders – including most of the major banks – your planner can give you an unmatched overview of what’s out there right now, and can design a mortgage plan that’s right for you.


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