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Fixed Vs Variable Mortgage Decision …. Look at the math!
Every day I hear the question, which mortgage product should you choose, fixed or variable? What I am about to share with you will be wisdom that will work in any market conditions, and perhaps most importantly – it will certainly help you determine the best choice for your own personal risk tolerance and financial circumstances.
Let me start off by saying that anyone who tries to suggest whether you should go with a fixed or variable rate mortgage without first taking the time to understand your own long term goals, your longer term cash flow objectives and most importantly, your own individual risk tolerance is a professional you should be wary of. The first thing I must tell you is that anyone who pretends to know what will happen with long term interest rates is delusional.
At any given point in time, Canada’s capital markets represent about 3% or less of global capital markets and thus are heavily reliant on exports to our key trading partners. No matter how closely we watch our own economy, we will always be subject to changes in our capital markets especially if there are any shocks in our global system and in particular, our key trading partner. – The United States of America.
What does this mean to the fixed – variable decision?
At any point in time, there is always a set spread between the discounted 5 yr fixed mortgage rate and the discounted variable rate product. Depending on what is happening at any given point in time this spread can increase or decrease as there is movement in the overnight lending rate set by the Bank of Canada or the Government of Canada Bond Market. The difference in rate represents the premium a consumer has to pay for the peace of mind for longer fixed rate mortgages. Conversely, the difference in savings by choosing a variable mortgage product represents the reward for taking on extra risk by not locking in your rate and protecting you against any future unfavourable risk movements.
Whats the real difference of a fixed term rate? It is just the guarantee that your payment will not move for the set period of time. The difference between the fixed rate and a variable rate is the rise and fall due to market conditions. When inflation is high this difference is greatest where when inflation is low, it has been less than 0.5%. No matter what the difference is between the two, it really comes down to one’s own tolerance to risk and the math you ultimately pay for that peace of mind or stand to save for taking on the extra risk.
Only you the borrower can decide what is best for you and your situation. If you want to look at the math, you need to multiply the mortgage balance between the difference in the fixed versus variable.
Example: Say the difference between a fixed rate and variable rate on a $100,000 mortgage is 1%. The additional premium for the peace of mind for 1 year would be $1000.00. If this extra cost seems expensive to you, then you may be a candidate for a variable rate mortgage. If the cost savings seems reasonable then you are probably suited for a fixed rate mortgage product.
Please remember this: There is no amount of financial gain worth putting yourself or your family under financial distress. If you cannot afford the upswing in interest rate’s, then going variable is not a sound decision.
If you would like to chat about the fixed vs variable mortgage and figure out how much money you could save – I would be happy to help. Give us a call at (780) 244-0505