BMO Report Explores Variable vs Fixed Mortgage Rate Debate
BMO Economic Research published a report entitled Should I Stay (Fixed), or Should I Go (Variable)? This is a topic that many of our visitors have and we get emails about it, as well as conversations in the “Ask an Expert” thread in our discussion forums.
Here are some of the highlights:
Historically, there is little debate which has been the better option: typically borrowers save money by staying in variable products, and riding the rollercoaster of fluctuating mortgage rates.
In fact, fully 82% of the time since 1975, the costeffective route for borrowers was to stay variable (Chart 1). And, if anything, the spread
between 5-year fixed mortgage rates and variable rates has been widening further in recent years, and is now close to an all-time high (Chart 2).
Pro – fixed rates
A conventional fixed rate mortgage can mitigate a number of risks such as inflation, which hasn’t been a problem in Canada since the Bank of Canada adopted inflation targeting, averaging precisely 2% since 1991.
However, there is an outside risk of an inflation flare-up as global central banks keep the pedal to the policy metal, and amid record government deficits, which risk sparking inflation
Either of those potential scenarios could force the Bank of Canada to raise interest rates aggressively, driving variable mortgage rates higher, but leaving fixed rate choosers unscathed.
Another reason fixed rates are attractive in the current environment is that short-term rates are already as low as they can go—rates are only going to move higher from here as the economy recovers.
Pro – variable rates
The clearest advantage to a variable rate mortgage is that it has been consistently less costly than its conventional counterpart over time. There have only been a small handful of occasions in modern history where a variable rate was the less favourable option.
There is also some risk to locking in as fixed rates could fall if the economy performs worse than anticipated.
The verdict
The decision really does depend on the individual. For those who don’t have a lot of financial flexibility, and would run into difficulty from a pronounced upswing in interest rates (typically first-time buyers), the moderate extra cost for peace of mind may be a price worth paying.
Our core view is that the most likely economic and interest rate outlook will ultimately again slightly favour the variable rate option, and its a much closer call than usual
This is pretty much the same conclusion that Dr. Milevsky came up with during his Fixed vs Variable research although, there is always the caveat that this is a very unique time in history, and this may again be a time to lock in rates. Be sure to speak to a mortgage professional before you take on your next mortgage and see what’s best for your personal situation.
Tags: fixed mortgage rates, variable mortgage rates
