Variable Rate vs Fixed Rate

Question: Should I go Variable rate or Fixed rate?

Answer:Depends!

Variable rate is based on the Bank Prime, which is what financial institutions charge to the consumer. Bank Prime is based on the Central Bank Rate (the amount of interest the Bank of Canada charges financial institutions for short term loans). As the Central Bank Rate increases or decrease, so does Bank Prime and in turn the variable rate. Over the last three months prime has decreased a half percent.

The 5 year fixed rate is based on the bond market. As the bond market increases or decreases so does the 5 year fixed rate. This fluctuation does not apply to banks posted rates as it does to rates accessible to mortgage brokers. Fixed rates are currently on a downward trend.

Instead of trying to guess where rates are headed, consumers would do better to think about their own situation. They should evaluate their personal balance sheets and risk tolerance. The decision of whether to go short (variable) or long (fixed) will depend on the consumers' tolerance for risk as well as their ability to withstand increases in mortgage payments if prime increases.

Something to keep in mind is that variable rate mortgages allow consumers to lock in to a fixed rate at any time without costs, with fixed rates currently in a downward cycle; the long term benefit of locking in at a later date may prove to have substantial savings. While there's no up-front cost to the change, from variable to fixed, NOT all lenders will lock in at the fully discounted (very best) fixed rate mortgage. Consumers should be sure to ask their lender if they will get the same fully discounted fixed rate upon lock in and consumers should also know that every lender has a different variable rate product to offer.

Email Lisette at lharris@tmacc.com with your questions, or call (905) 529-1199