My Fixed or Variable Mortgage Rate Decision
Back in 2008, I opted for a variable mortgage rate and it has proven to be the best decision ever. My rate is currently at 2.50%, a substantial drop from the starting point of 4.25% in 2008. With less than a year to go before I get to renew the 5 year term, you will be surprised that my decision has already been taken before hand to stick to a variable rate mortgage for the following 5 years for a few reasons.
People that go with a fixed rate mortgage typically like the predictability of their payment. They prefer to pay a higher rate rather than save a little bit of money in exchange of uncertainty. In my case, the uncertainty was a welcome addition because this level of pressure that I introduced on my finances translated into lump sum annual payments. I was simply racing to pay off as much as possible in a defensive manoeuver against rising rates that have yet to materialize.
The strategy has worked perfectly for 3 reasons starting with enjoying a stable job at the time, having the risk tolerance for variable rates and finally my personal preference of injecting extra cash flow into my mortgage rather than invest it. As a result, my outstanding principle is currently more than 50% lower than the initial starting point.
But with today’s small difference between fixed and variable mortgage rates, is it still worth going with a variable rate? In my opinion, you bet! Brokers, analysts and other pundits have claimed over the past 3 years that creeping mortgage rates were imminent. Yet here we stand with Canada’s rates frozen in time and if you’ve read my last set of interest rate predictions, I believe they’re going nowhere soon.
You see the debt woes of Europe are not something you can fix in a few months. It’s a matter of a few years, there’s a lot of deleveraging to do and a lot of balance sheet fixing to happen. Unless debt is outright wiped out – ie default – there is no easy fix.
Europe’s debt problems are weakening the global economy where even the rising BRIC countries are feeling the impact. The US has its own issues and has declared more than once that its rates will be frozen until the end of 2013 if not beyond. Canada is no island and will have to take the state of the global economy in consideration before raising its rates.
This is the basis of my move, rates will not be moving in the near term and when they do start moving it will be gradual and slow for fear of shocking the economy. The risk of seeing rates exploding higher is mitigated by my lower principle and the fact that I can lock up a fixed rate at any point in time. It’s not like we will wake up one day with a rate bump of 3-400 basis points in one shot.
While I am on track for a happy ending in my mortgage journey so far, I did commit one mistake: I never went shopping for mortgage rates. At the time, I simply went to my bank and signed the dotted line. Don’t get me wrong, it’s still a good rate but I might have done even better had I visited a mortgage broker. I might have also ended up with better prepayment terms as I am limited to a max of 10% per year – I’ve met some friends with up to 25% for a maximum. No matter, at this point all I am looking forward to is closing off the remaining mortgage in the next 5 years as a maximum timeframe.
Today, would you go with Fixed or Variable mortgage rates?