Fixed or variable, that is the question

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With interest rates sinking to record lows, mortgage brokers are facing increasing demands from clients about whether to choose a fixed-rate or variable-rate mortgage.

"Most variable-rates are sitting just above three per cent and we expect rates to stay like that until we get out of the recession, which is probably going to be in about a year," said Mark Herman, an agent with Mortgage Alliance in Calgary, who said he's been getting constant calls from clients and has been talking to colleagues about new fixed- and variable-rate offerings.

He said many borrowers are choosing a variable product to take advantage of the low interest rates, with plans to lock into a five-year fixed-rate mortgage when interest rates start to rise. This strategy was also touted on former Conservative MP and author Garth Turner's blog last week, writing that the "best possible course of action" is to choose a variable-rate mortgage, use the money saved on low rates to pay down the mortgage principal and then lock into a fixed-rate when they go up.

In this scenario, borrowers would have to lock into a fixed-rate period that's at least as long as the period left on their original variable-rate product, said Herman.

He added that while variable-rate mortgages look good, first-time homebuyers who aren't as familiar with the market might prefer a five-year fixed-rate product or take advantage of  a something like a 10-year fixed-rate mortgage at 5.25%, which is currently the lowest rate for that product on the market.

  • Brian Mooney on 2009-03-27 7:35:05 AM

    If someone can explain why a five year fixed rate [quick close] of 3.99% or 4.05% [regular close] is not more secure, worry free then a variable rate mortgage at about 3.3% I'd like to hear it. Even in the above article it is said "lock into a fixed-rate when they go up" Well, when they go up it's too late !!! There is so little spread between the fixed rate and variable rate that it is a dangerous game to get into, particularly if you're not a sophisticate in the industry.
    Todays fixed rate 5 yr. term mortgages is lower then ever I believe in the mortgage brokerage business history. Jump on it!!! or 7 or 10 yrs. There is virtually only one way variable rate mortgages can go.......UP !!! The short term gain is not worth the long term risk.

  • Hal Tagg on 2009-03-27 7:42:05 AM

    For an article such as this I would have expected a more respected authority than a Mortgage Alliance agent. How about Benjamin Tal or Don Drummond. No disrepect intended to Mortgage Alliance or Mark Herman, but if you are going to quote someone, I would prefer to read about a respected economist instead. And Garth Turner is hardly a respected economist.

  • Andrew J on 2009-03-27 8:12:24 AM

    I agree Mr. Mooney but remember most don't know they can get 3.99 and are quoted in the low to mid 4s so 3.3 compared to 4.3 or even higher posted rates looks pretty good ;o)

  • Mike Toporowsky on 2009-03-27 8:31:50 AM

    Anybody who has held a mortgage in the 80's can attest to the fact that the inevitable inflationary cycle can be a volatile as the recessionary cycle. Rates can swing quickly and the initial mortgage strategy needs to address wide rate changes.

  • MortgageBrokerNews Editor on 2009-03-28 7:23:20 AM

    I understand where you're coming from Hal, but we thought this would be a good chance to give brokers a say, as these well known economists are always being quoted in the news. Benjamin Tal, for instance, was on CTV early this march sitting on the fence:
    He said variables would be a good bet for at least two years, whereas if you're risk averse, it's a great time to lock into a fixed.

    But since you asked, we contacted Don Drummond, who said that while he can't speak on behalf of TD, he feels much the same way (ie: variables are great right now, but if you're risk averse, so are fixed).

    When asked what his own mortgage is, he said that he doesn’t have one, but when he did, it was fixed, because he is risk averse.

    Hope that answers your question. Thanks for the comment.

  • Michelle Brienza on 2009-03-28 7:46:59 AM

    Hi Brian, providing the client is risk adverse, the variable is definately the way to go, provided you take advantage of the rate. I advise my clients to increase their bi-weekly payments to match or beat the payments they would have made had they gone fixed. When we crunch the numbers, there's about a $14,000 savings. With a variable, you can lock in...even if you lock in a little higher, you're still ahead of the game...

  • Calum Ross on 2009-04-07 6:24:04 AM

    I was a little suprised to see the comment above by Chris Bisson, with all due respect Chris... I know that wasn't what they taught you in finance class when you got that commerce degree of yours. While there is absolutely truth in the fact that, "As soon as you hear there are concerns that inflation is on the rise you should lock your mortgage down."

    While it is absolutely true that mortgage rates and particularly fixed mortage rates do rise to reflect inflation, this does not tell the whole story. Having worked on a bond desk before and earning both an undergraduate and graduate degree in finance I can tell you that by the time that inflation is on the rise it has already been well 'priced-in' to the bond markets and thus fixed rates have already been adjusted to reflect inflation. There is not one exception to this rule in the last 75 years of mortgage market history.

    Locking in your rate in response (response being the operative word) to market dynamics would be timing the market and given the fact that over 70% of mutual fund managers can't time the markets effectively (on any given year) then how can our clients and for that matter even us? I personally go to great lengths to avoid anything that indicates we can predict long term trends - CIBC World Markets can't and they have had the top rated bond market analysts for several consecutive years.

    While the variable versus fixed argument may be subject to debate based on variable rate pricing changes - the short versus long research is not in debate. The long-term validity of the previous Moshe Milevsky is yet to be re-validated on the variable side but the findings about 1 year fixed versus 5 year fixed still hold true. In the long run short term mortgages will almost always save over longer term mortgages... with or without inflation and averaging out over almost any economic shock.

    It is my hope that my comments make a lot of sense. I should also point out that Chris Bisson has done a good job of collecting on the topic.

    Wishing you all the best!

  • Matt B on 2009-05-13 2:43:16 AM

    With bond yields on the rise it looks like it's a good time to lock into a fixed, before they start to go back up.

  • Chris Bisson on 2009-03-29 2:27:20 PM

    You can view a bunch of articles I have posted on this subject at and to get to the point: For anyone that is closing soon the VRM strategy is a good one given they will save over a half of one percentage point for 4-8 months.

    What people haven't mentioned is what to really look for as a cue to locking into a Fixed Rate Mortgage. And that's news that inflation is on the rise. As soon as you hear there are concerns that inflation is on the rise you should lock your mortgage down.

    Lastly, Tal is right when he says the risk averse should take a fixed rate mortgage. When is the last time you’ve seen a 5-year fixed rate at 3.99%?

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