Fixed vs. variable: The debate heats up

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A long-stalled overnight rate has had brokers embracing the variable-rate mortgage but will a new forecast from a major bank convince them that fixed is superior, once again?

“While we have in the past supported going variable, and even though short-term rates are likely to remain low this year, current offers on long-term mortgage rates and the improving economic outlook tilt the balance in favour of locking in at this stage—fixed now modestly trumps variable,” Douglas Porter and Benjamin Reitzes, BMO economists said in their latest report. “Not only does our interest rate outlook project an advantage to locking in at current attractive 5-year rates; but, combined with a shorter, 25-year amortization period, such a step would significantly dampen widespread concerns about the vulnerability of household finances.”

Entitled “Mortgage choices: The fixe(ed) is in,” Porter and Reitzes explain that although variable rate mortgages have been the cheaper option 85 per cent of the time since 1975, the value gap has been shrinking and an improving economy is believed to hike interest rates in 2015, which would result in a rate increase to variable products.

“The bond market has sent out loud warning signals over the past year that the era of low interest rates may finally be drawing to a close,” the economists said. “For instance, 5-year Government of Canada and U.S. Treasury bond yields neared 2½-year highs early in 2014, on an improving outlook for the global economy and expectations of continued Fed tapering.

“As bond yields rise, the cost of funds for lenders also rises, ultimately putting upward pressure on consumer and business borrowing costs, includeng long-term mortgage rates.”

Still, the pair don’t discount history and believe there is still a case to be made for choosing a variable rate mortage.

The clearest advantage to a variable rate mortgage is that it has consistently cost less than its conventional counterpart over time … (and) plus, one can always lock into a fixed rate at a later date,” they said.
 
  • Mark Fidgett on 2014-03-14 11:46:15 AM

    Ukraine, Venezuela, Middle East, Africa, Asia… revolution and conflict in all of the energy producing countries...might want to re-think that one. #Justsaying

  • Okanagan Broker on 2014-03-14 12:29:00 PM

    Skip the "debate" and simply do what is in your CLIENT's Best Interest! probably 90% of my clients select FIXED simply for the security & stability it provides, and when you are a 1st time buyer, or have young kids, or we are pushing the limits of GDS/TDS at the time of approval a Fixed rate IS the best way to go...Sure, the Variable likely will offer some savings, but for the "average" consumer STABILITY/SECURITY is what they seem to want...and I cannot disagree...

  • Omer Quenneville on 2014-03-14 4:24:04 PM

    fixed is superior, once again... Ive never known fixed to be superior. And the statement about variable has been the best choice since 1975. Think twice before you lock your clients into a fixed rate with a costly discharge penalty or nontransferable TD collaterial mortgage. You are right, put your clients first and their wallet and go variable. I challenge anyone here to show me one person that lost on variable. I can give you lists of people that got burned on fixed.

  • Faye Drope on 2014-03-14 6:22:59 PM

    I don't see the rates rising either. Of course do what is right for your clients that is a given, however if were just debating fixed vs variable I think Variable is the answer. Mark your analogy is correct however Quebec and their little moaning party could spark movement in the bond markets. There is where I see any threat if there is one.

  • Mike Maguire on 2014-03-18 12:35:36 PM

    What about the IRD penalties. Fixed are certainly the best option for banks as we are now seeing IRD penalties on 2.99% rates. Big reason to take a variable and never end with a huge penalty.

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