If you look over the last 5 years, its hard not to argue why variable mortgage rates should be preferred over fixed mortgage rates. For instance, the variable rates have been lower and because they’re variable, interest rate drops provide an instant benefit. And because they’re open for repayment, you don’t have any penalties associated with early repayment.
But this is also the benefit of hindsight. Yes, people who have stuck to variable rates in recent history have saved themselves some money. But will this trend continue into the future?
Fixed mortgage rates provide cash flow stability for the period of time (1 to 5 years) you lock the rate in for. You’re not going to be able to take advantage of interest rate drops but you’re also protected against the rate spiking up. And even though prepayment penalties tend to exist on all fixed rate mortgages, some programs offer very generous prepayment privileges such as paying up to 20% of the original mortgage amount down each year above and beyond your required mortgage payments.
The financial future speaks to capital market instability and the threat of continuing rate increases. And while we haven’t seen much of this yet, the threat of rising rates that stay up remains.
So choosing variable mortgage rates versus fixed mortgage rates for a residential mortgage has very much to do with your personal preference and personal risk assessment of the future.
From a cash flow point of view, a variable rate right now saves you money versus the longer term fixed rates. But if you’re cash flow depends on the current variable rate to pay your mortgage each month, what happens if rates spike up? Can you afford to be living on the edge with a variable rate?
From a future financial planning point of view, are you expecting to earn significantly more money in the coming years or come into additional funds that could be used to pay down your mortgage? If this is the case, a variable rate likely makes more sense than a fixed rate.
So besides your preferences and financial planning, the other side of the coin is can you afford the risk of the interest rate significantly moving against you? If you can’t pay your mortgage at a higher rate, you could lose your house or fall into higher cost personal debt trying to make the cash flow work.
Right now, you could argue both ways which is better, variable or fixed, and in both cases the argument can be sound.
It comes down to a personal choice as to your own opinion of where you think the market is going and what you’re personal cash flow is going to look like over the next 5 years.
The best way to figure out what is the best fit for you at any point in time is to discuss your current requirements and preferences with a licensed mortgage broker so you can better evaluate the pros and cons of different variable mortgage rate programs and fixed mortgage rate programs.
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel