Variable or fixed rate mortgages? | Mortgages | Discussion forum

It depends entirely on whether interest rates go up or down during your term.
If they go up, you win with variable; and vice versa.
For a number of years now, rates have been going down or holding steady most of the time. So, people who took variable rates during that time have indeed done better than those who took fixed. Will this continue to be the case? Get out your crystal ball!

In general, when you are at the beginning of your mortgage, you don't want to take the risk of rates going up so you are safer with a fixed rate, because you know it won't turn into something you can't handle before the term is up. When you're further along with your mortgage, you may be more able to take the risk, so you might be more comfortable with variable.

Loonie, I agree, but you say "If they go up, you win with variable; and vice versa." I think you meant to say if rates go up you lose with variable, and the rest of your post seems to assert that. In any case, since the Twin Towers were knocked down in 2001 and exacerbated by the subprime loan fiasco, we have been generally in a long-term downtrend for rates and now that there's acceptance of a concept like negative rates in the mainstream discussion, well, you know something wacky's up. So the crystal ball has been very cloudy for some years now. And I'm not sure how closely the last 15 years or so can be related to "normal" (if there is such a thing), long-term data.

In my own opinion, fixed vs variable is kind of whether you want insurance of certainty with a price. All the financial decisions come with this type of form. You are betting against your mortgage investors.

The simple question : can you take the risk?

Warren Buffet, Bill Gates, etc, never bought himself any insurances because of his fortune and risk torelance.

I'm in the get-rid-of-the-mortage-asap crowd. In my 20s I bought my first house and was ready to hunker down with a 30-or-so year payment schedule when I met a 20-something co-worker who had just paid off his house. I'd never even thought of that concept, thought it made sense, so we lived on as close to zero as we could (I won't bore you with the sordid details of our Scroogy-ness during that time) and paid off our mortgage by age 30. And we've resisted the urge to "move up", raised our family there, it's still the family home. (Another essential detail is we removed ourselves from the GTA - much more reasonable prices, among other advantages.) The only downside was I could never participate in the mortgage-complaining discussions & interest rate worries of my friends and relatives but otherwise for us it's been a very good call. Just an idea someone else might find interesting.

My son just bought his first house yesterday.It closes in Apr/30th.He has been pre-approved for financing & asked my opinion about fixed or variable term.3.15% variable for 5 years or 3.64% fixed for 4 years or 3.74% fixed for 5 years.I personally like the 5 year fixed,knowing payments remain the same.He is a bit of a gambler.From articles I've read the variable rates generally end up better in the long run.Any thoughts would be appreciated.

Since he's at the beginning of his mortgage and, presumably, early in his career as well, I would look at his entire financial situation before deciding on which payment system to use.

Questions such as how secure is his employment situation? what would he do about the house if something happened that he couldn't carry the mortgage? does he have a healthy emergency fund? etc. are relevant. If he doesn't have solid answers, then I would go for the five year term at this time. The first five years are the most challenging, IMO. Perhaps, when he renews in five years, he can afford to take the risk of a variable rate as he will owe a bit less and should have a higher income.

However, if his situation is secure, if he'd be willing to sell or take in a roomer/boarder or basement dweller if necessary, if he'd be willing and able to curtail other expenditures if he had to, if the bank of mom and dad is available as a last resort, and if he's a generally responsible person, then I might risk the variable rate.

Variable 3.15 could reach or even exceed 3.74 before five years are up if we remain in a rising interest environment. We saw that much of an increase last year alone - at least on the depositor side. To use one random example that is very convenient for me to access, the one-year average GIC rate at Hubert went up from 2.25 to 2.95 between Nov 2017 and Nov 2018, and has since gone up to 3.10 . If he'd bought in Nov 2017 with a variable rate, he might be kicking himself now or within the next while. We may still be in one of those 10-15% of time periods when fixed is better, but we don't know, so that is why the other considerations are so important. I don't really think it's about guessing which way the wind blows; I think it's about assessing your personal situation overall.

It's a good sign that he asked your advice!

If he takes the variable rate, he should look aggressively at prepayment options. Try to pay off extra principal and shorten the amortization whenever possible. Not everybody supports this idea, but, personally, i believe we are heading into very uncertain times, so I would want to get rid of debt asap so as to be better positioned to deal with other issues. He needs to consider where he stands on this, and make a decision that fits his understanding and expectation.