Ah, the debate continues…..does a variable rate provide a better return than a fixed rate? Will you make the right decision? Well don’t be afraid. Fear the lunch special at your work’s cafeteria but don’t fear your mortgage decision, it is not so scary. The nice thing about interest rates right now is that both fixed and variable rates offer great value! They are at a historical all time low. All you need to do is decide if you like the smooth ride of a Rolls Royce or the high octane excitement of a Ferrari. Both are great vehicles and will take you where you want to go! Here are some nuggets to ponder while you are making your decision to go fixed or variable…..In Canada, we are currently coming out of the lowest rate environment in our history. Rates have nowhere to go….but up…or sideways a while longer. Depending on the economic recovery and the Bank of Canada’s strategy to stimulate growth and control inflation, the prime rate climb could be a mid to longer term duration. Prime has been bouncing around the all time lows for some time now with small pushes up and then pullbacks. Let’s simplify what this means.
The Prime Rate is adjusted by the Bank of Canada (BOC) when the BOC wants to either stimulate the economy or adjust for inflation risk levels. Sounds confusing right? Basically, the BOC will want to stimulate the economy, rates down, when we are all hoarding our money and counting coupons. Conversely the BOC will want to slow things down, rates up, to control rapid price increases when we are spending mad loot on diamond encrusted cell phone cases. The best way to encourage Canadians to spend money is to make it less expensive to borrow it. As soon as the economy strengthens (people spending again)….we will see the BOC raise the prime rate (like they did over the past couple of weeks) to control inflation.Well that all sounds rosy doesn’t it? Not to strike fear into anyone’s heart, things can get nasty when the BOC and Economy don’t cooperate to make our life easy. Rates can and have moved relatively quickly in the wrong direction for home buyers or folks renewing. A relatively recent example being the late 80’s debacle where many people lost their homes, trailers and doghouses when the prime rate moved into double digits! While that scenario is highly unlikely to re occur, if you are a person who is more comfortable in a conservative, predictable and risk averse financial situation, you may want to go with a safe and predictable fixed rate over a variable rate. Fixed rates will provide a predictable monthly payment over the term of your mortgage.
However, if you like to have your finger on the pulse of the economy and can handle the stress of watching the prime rate fluctuate then you might want to consider choosing a variable rate. The variable rate historically has given a better return over the long run but spikes over the course of some years can cause problems for people not prepared to handle an increase in monthly payments less predictably.
Ok, you can get back to your favorite reality show now and focus on what’s important. Who has the immunity idol? Is that guy really singing about chickens? One last thought…..do your research, evaluate your options and find knowledgeable people to help you make your mortgage decision. Hey…I’m available, give me a call. I'd be happy to help!
