Fixed vs Variable. How should you decide?

One of the most common questions I get from clients (particularly as of late), is around the age old question - should I choose fixed or variable?

Most people assume it comes down to trying to predict where rates are going. I believe it comes down to something else entirely. How comfortable are you with change?

If the idea of your rate moving or hearing about an up and coming Bank of Canada announcement is going to cause you stress or keep you up at night; then a fixed rate is usually the better fit. There is real value in knowing exactly what your payment will be. 

For those who are comfortable with some short-term fluctuation, it is worth considering the flexibility and opportunity that a variable rate can bring along with it.  

Three reasons to consider variable 

1 - Given the current geopolitical circumstances that we find ourselves in. Fixed rates have risen quite a bit, but Variable rates have not. This means that variable rates are currently lower than fixed rates by a decent margin.

2 - When you are in a variable rate mortgage, you can switch from variable to fixed at any time, without penalty. If your comfort level changes or if fixed rates drop, a variable rate can keep you poised to capitalize on the opportunity.

3 - The penalty. The cost to break a variable mortgage can be significantly less than that of a fixed rate mortgage. When breaking a variable rate mortgage, you are subjected to paying a 3 Month Interest Penalty – which can be thousands of dollars less than the Interest Rate Differential (IRD) penalty that most fixed rates are subjected to, when being broken early.

Not all Variable Rate Mortgages are the same 

One thing to keep in mind, is that not all variable rate mortgages work the same way. There are two common types:

An Adjustable-Rate Mortgage (ARM) means your payment will change when the Bank of Canada rates change. If rates go up, your payment goes up. If rates go down, your payments go down.

A Static Variable Mortgage keeps your payment the same, even if rates change. Instead of you rate changing, the portion of your payment going toward interest and principal adjusts on the back end.

The choice between adjustable and static comes down to whether you prefer your payment to change with the market or stay consistent while the structure adjusts in the background. 

Final thoughts

The right mortgage is about choosing a structure that fits your comfort level and provides you wit the flexibility you need. Strategy supersedes rate every time. Make sure you understand your options; the benefits, and the drawbacks.

Do you prefer certainty, or are you comfortable with some flexibility when it comes to your mortgage?