Home > interest rates, personal finance, real-estate > Mortgage Rates – Fixed or Variable? Redux…

Mortgage Rates – Fixed or Variable? Redux…

There are plenty of debates on which mortgage rate is better/cheaper to the customer… fixed or variable? Historically variable rates have been lower than fixed rates… agree but just by looking at the two rates at a point in time doesn’t prove that Variable Rate is cheaper than Fixed…

I have seen just one chart comparing the 5-year discounted Fixed Rate to the then Prime Rate (which is a proxy for Variable Rate)… This only shows that variable rate is generally lower than fixed rate at a given point in time… Most brokers forget that variable rates change throughout the term as Bank of Canada changes the bank rate…

To really prove that Variable rate is better than fixed…mostly… i took data from 1973 and calculated the Realized mortgage rate (average rate) on a Variable Rate mortgage over the 5-year term and compared it to the 5-year Fixed rate at the beginning of the mortgage term… The realized variable rate can be thought of as the average or equivalent fixed rate over the 5-year period…

And here are the results… there have been 4 instances in the past 38 years when the variable rate is cheaper than fixed rate at mortgage initation but ends up costing more than fixed rate over the full 5-year term!!

Chart showing fixed 5-year mortgage rate and the realized 5-year variable rate

Source: Bank of Canada

what are your thoughts?

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  1. Zohaib
    February 8, 2011 at 2:58 PM

    I currently have fixed at 3.15 which is only 18 months shy of term end. I’m a bit puzzled as to if I should move to variable. Which I hear will be 2.2 or something like that. As things look for economy, would you think prime will be increased anytime soon?

    • February 8, 2011 at 3:30 PM

      as it stands now, the 1 year government of canada treasury yield is ~1.35%… which implies that Bank of Canada rate will be roughly 0.5% higher than it is now and hence prime will be higher by at least the same amount.

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