Don't make the variable rate mortgage mistake

In the past, mortgage borrowers have typically come out ahead by taking a variable rate mortgage.  However that was then and this is now.  Today’s market is an entirely different situation, making past performance irrelevant.  Right now, the ‘market’ 5 year fixed is between 3.29% and 3.39.    The lowest available 5 year variable is prime -0.25% , which is only 0.54% cheaper.  While this may sound like quite a savings, the difference was always around 1.50% - 2.00% when borrowers typically came out ahead with a variable rate mortgage.   A much narrower gap means elevated risk.  The Bank of Canada makes an interest rate announcement 7 times per year.  They only have to increase the prime rate twice (at 1/4 % each time) for the variable rate to equal the fixed in this example. That doesn’t leave much room for it to play.  We also know that it isn’t going to get any lower than what it is, so the only direction it can move is up.

For those die-hard variable rate seekers, here is what I am going to suggest for you.   Take out a 3 year fixed at 2.99% instead.  This is only 0.24% higher than the variable rate of 2.75%.  The Bank of Canada only has to increase the prime rate a single time for the two rates to be even, and that could come at any time.   At the end of the three year term, chances are that there will be deeper discounts on variable rate mortgages, and a larger gap between fixed and variable rates.  At this time, a variable rate mortgage may once again be the route to go.  In the meantime, this is not only the safest option, but most likely the one that will save you the most money over time as well.

The lowest rate doesn’t always mean the most savings for you.  Make sure you choose a mortgage professional who is going to take the time to put a plan together for you to ensure you are saving the most amount of money over the course of your mortgage, and not someone who will forget about your after your mortgage closes.