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Let's talk about variable rate mortgages!

With all the recent news about the Bank Of Canadas potential rate hikes there have been a lot of discussions on whether its better to go fixed rate or variable rate. What do you think? Better to go fixed, or variable? Most clients that come into my office already have a negative notion when it comes to the variable rate mortgage which shouldn't be the case. In this post, I’ll compare both scenarios, and take a look at what happens should interest rates rise.

I am looking at buying a house, should I go Variable or Fixed rate?

Neither is wrong. It all depends on your individual situation and a little bit of risk tolerance. Everyone's situation is different but lets take a look at a hypothetical situation:

The Scenario:

  • $300,000 Mortgage
  • Variable-rate mortgage @ 2.50%
  • Fixed-rate mortgage @ 3.30%
  • Mortgage term of 5 years
  • 25 year amortization
  • Monthly payments

First, let’s take a look at a hypothetical scenario where variable prime rate stays the same over the course of the 5 year mortgage term:

                                               Variable - 2.50%                                       Fixed - 3.30%

Monthly Payment                             $1,344                                                   $1,466

Interest Paid                                  $34,548                                                  $45,864                              

The monthly payment for a variable-rate mortgage will be $1,344/month, while the fixed-rate mortgage will come in at $1,466/month. This may not seem like a huge difference ($126/Month), but it really adds up quickly when we look at the total interest paid. By going with the variable-rate mortgage, if rates don’t rise at all, we will save $11,316 in interest over the 5 year term.

Is it realistic to expect rates to remain the same for the next 5 years??

It's certainly possible, as there was no increase over the past 7 years before this previous year. However, if you look at what economists are saying recently, it's probably not realistic. Let’s look at another possible scenario: The Bank Of Canada increases rates once a year, for the next 5 years. That means that 5 years from now we have a variable mortgage rate of 3.75%, with a prime rate at 4.70%. How would things look then?

                                 Variable - Increase of .25%/Year                               Fixed - 3.30%

Monthly Payment                   $1,344 - $1,538                                                 $1,466

Interest Paid                               $43,532                                                      $45,864      

The two mortgages become much closer when you look at it that way. However, the variable rate still comes out slightly ahead. In my opinion I have a hard time imagining the prime rate reaching 4.70% right now, but I am a mortgage broker, not an economist!

Anything else?

One last feature that often gets over looked when choosing a mortgage is what the pay-out penalty is. Did you know 83% of Canadians break their mortgage before their term is up? This is a staggering statistic and something can can occur for a variety of reasons including sale of the home, refinancing, etc.

Let's have quick look at a variable rate penalty versus a fixed rate penalty 3 years into your term:

           Variable - (3 months Interest)         $275,000 Owing          Fixed - (3% Balance Remaining)

                           $1,583                                                                                 $8,250

Variable rate penalties are generally capped at 3 months worth of interest which equates to $1,583 for a payout penalty in this case. Fixed rates are different depending on the lender but in this case we used one where 3% of the balance is used and you would be hit with a huge penalty of $8,250!

All food for thought when considering your next mortgage. Like I mentioned earlier everyones situation is unique and different and what is right for one person may not be for the next. It is my utmost priority to get to know my clients needs and financial goals when I meet with them so I can lay out all the best options for them. But at the end of the day, it truly is the clients decision which mortgage product they are most comfortable with & which route they would like to go.

As always, never hesitate to contact me with any of your mortgage questions or needs:

100% Confidential, Unbiased & Professional Mortgage advice.

Braeden Moskowy | www.bmoskowy.ca | braeden@TMGregina.com | 306-527-1479