Should You Get a Fixed or Variable Rate Mortgage?

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It can get confusing. The Bank of Canada recently lowered interest rates again, now putting prime at 4.5%. That impacts your savings and borrowing. You will receive less on a fixed-term investment like a bond or GIC and hopefully pay less on a new mortgage.

However, the choice can be confusing. Fixed or Variable rate?

A fixed-rate mortgage means that for the mortgage term, the interest rate can’t change regardless of what happens to interest rates. If rates go up, you will still have the same rate if you deal with the bank and have that mortgage. On a variable mortgage, the amount of interest you pay will fluctuate based on the sudden change in rates, but often, you are making the same payment, just less of it goes to the principal when rates rise.

Today, a Fixed 5-year rate is 4.59%, and a five-year Variable is 5.5%.

Most of us who have lived through the 20% interest rates of the past, have a problem getting the variable rate.  It is a gamble regardless of what anyone tells you about them and while you may save a bit of money should rates drop, if you worry about this is it worth it?

I would never take out a variable-rate mortgage.

I was penalized when rates dropped to 2.5% on a five-year mortgage because a few mortgages on rental properties had a few years left, so I broke those mortgages to get the new low rates.  I had to pay significant penalties.  In the end, it was well worth it, but one of the drawbacks of being locked into a long-term mortgage rate is the penalty should you want out.

The key calculation for a rental property is the cash flow you would receive assuming you have a five-year fixed mortgage on the property.  At today’s rates, what amount of cash will be coming in each month?

Your personal property mortgage interest is non-deductible, as the home is not considered an investment. This means you are making payments from after-tax income. It is very expensive indeed. In many cities today, it makes more sense to rent rather than buy a home and take out a mortgage.

In our Bee Money Simple philosophy, the risk probability of choosing a variable-rate mortgage cannot be predicted.  Rates could spike to 10% or more for example, and your payments would go up significantly.

Our philosophy is supported by choosing the fixed five-year rate.  Once you have that locked in, your returns are guaranteed to be immune from interest rate fluctuations.  I’m 100% sure of that, which is a probability of success that fits with Bee Money Simple.  Why complicate things?

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