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Fixed vs. Variable rate mortgage

October 17, 2008 - Updated: October 21, 2008

Here are 2 somewhat different views about whether to lock in your mortgage rate or not.


I found this Q & A in an article something that a lot of people are thinking about right now.


Jim Hatch, from the Richard Ivey School of Business at University of Western in London, ON

Question:  I have a variable-rate mortgage. Would it be better for me now over the long run to lock it in before the rates start going up again?

Answer:  A fixed-rate mortgage is one in which the interest rate you will pay is fixed for a period of time. For the typical homeowner, that period is five years.

A variable-rate mortgage is one in which the rate changes periodically in response to increases or decreases in the general level of interest rates.

If you feel you can forecast interest rates and for example you feel interest rates will decline, then you might want to take out a variable-rate mortgage today and take advantage of lower interest rates next year.

However, most of us have no ability to forecast interest rates. Under these circumstances, you are well advised to take out a fixed-rate mortgage which has payments that you can readily afford given your salary and household budget. Thus no matter where rates go over the next five years, you are assured of making your regular payments.

Peter Kinch from The Canadian Mortgage Team writes:

Don't Lock In Yet
The Bank of Canada had already lowered rates by a half point and followed it up this morning with another .25% cut. What we don't know is if the chartered banks will follow with a further drop in the Prime Rate. That would place Prime at 4% for the first time in years. If you are currently in a variable rate mortgage - ride the downward trend. If you are trying to get a mortgage and Prime is at or below 4% - then Prime + 1% is still better than the best 5 yr rate on the market today - and with more rate cuts on the way, I'd stick with Variable at this point. Just be careful, the tide will turn in the second half of 2009, so be prepared to lock in.

If you are still looking for the Prime - .90 variable mortgage that you got on your property last year and you're crying because no one is offering it - Get over it and learn to adjust to the new realities of the marketplace! Prime minus Variables are history for now. But there are great deals to be had in real estate right now with many motivated vendors, and viable financing options are still available, so if you've been sitting on the fence, you need to secure financing before we see a continued escalation of financing costs.

Tagged with: mortgages interest rates
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