One of the most frequent questions I'm being asked is whether it makes sense to go with a variable rate mortgage over a fixed rate mortgage. Unfortunately there is no easy answer to this question because statistically speaking those who have chosen to go with the variable rate mortgage have been the beneficiaries more than 80% of the time. As we saw though in the latter half of 2007, the variable rate can move quickly and for those who were looking to lock-in to a fixed term, the rates had already gone up considerably. One of the key determinants I suggest in determining which one is best for my clients is their capacity to accept the interest rate risk and be able to afford a higher payment in the event that the rates go up. Fixed rate mortgages carry neither of these risks as the borrower knows their interest rate and their payment for the length of the term. Another factor for consideration is that clients must be more dilligent in monitoring rates both on the variable side and the fixed.
Economic factors will determine how long rates continue to remain at record lows as central banks around the world try to stimulate growth. There is no evidence to date that the global recession is turning around or even nearing a bottom. This bodes well for those who have chosen the variable rate mortgage as there seems little risk in the forseeable future that the Bank of Canada will start to increase rates any time soon. The caveat to this statement however is that given the flood of liquidity the Bank of Canada is pumping into the financial system, there will come a point at which the economy will gain traction and begin to turn around. Once this point is reached, the massive amount of money that the Bank of Canada has injected into the economy runs a serious risk of creating severe inflationary pressure. The only option for the Bank of Canada is to raise interest rates quickly and try to suck the excess liquidity out of the system. That is why borrowers who have chosen a variable rate mortgage will need to be extra dilligent in looking for signs of an economic recovery and be ready to act quickly to convert their mortgage to a fixed rate term.
