Chapter 6 – Variable vs Fixed

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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

It is much harder to qualify for a variable rate. In April 2010, the government introduced some new regulations which required lenders to qualify variable borrowers based on the 5 year posted rate- which is usually much higher than what their actual rate would be. Sometimes it’s a difference of hundreds of thousands which can obviously be a major factor in deciding which route to go.

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.

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