Whether to go fixed or variable really depends on the person. When taking variable, you have to be comfortable with the fact that your rate and your payment could increase at any time. There are 8 rate announcements per years by the Bank of Canada. We have now seen five increases to prime rate since July, 2017. It has been predicted that prime rate was expected to increase at least two more times this year, perhaps even by the summer. With new economic uncertainty created by the announcement of the GM plant closing in Ontario, and the oil situation in Alberta, the BOC may not increase rates as quickly as they were hoping too. Even if they were to move forward with their planned increases, we could then expect to see it level off, or even start to drop back down again. It would be quite a rare situation for us to go the next 5 years without seeing any decreases and chances of that happening would be quite minimal. In fact, it’s extremely unlikely and it would be unprecedented.
The above is all speculation and anything can happen. In the period between September 2010 and July 2017, one of the longest streaks in history without an increase to prime rate, every year leading economists were predicting that prime rate would increase 'next year'. However that never happened until 2017. In fact, it ended up decreasing. Twice. Anything can happen here.
Even if prime rate were to increase this year to the point where it goes up above the fixed rate you would be offered today, that doesn't mean you would be losing. Not at all. You would just start to give back some of your savings. You wouldn't know until the end of the 5 year period if you came out ahead. Again, it would be an unlikely scenario for us to go the next 5 years without seeing any decreases.
Over the past 30 years, people have typically come out ahead with variable rate. This doesn't mean they ALWAYS come out ahead with variable however. The question is, how would you feel if your rate and payment were to increase within the next few months? and then again a few months later? These are things that you have to be comfortable with when taking a variable rate. If you will feel anxiety at the thought, then a fixed rate might be a better option. The best choice isn’t always the one that saves you the most amount of money, it’s the one that allows you to sleep soundly at night.
All that being said, now that the 5 year fixed rate has come back down to as low as 3.29%, the spread is definitely a lot thinner. Two rate increases and rate would even. Three and it would be higher. As mentioned above, this doesn't necessarily mean you would be losing out. The thinner spread definitely does make fixed an attractive option. As far as which one is better? The better question is which one is better for YOU personally. If you have a higher tolerance for risk, then you may want to consider the variable rate. If you're more risk adverse, then I would suggest going with the fixed option.
Another strategy I often suggest is to go variable, but set the payments to match that of the 5 year fixed option since you were prepared to pay the higher payment anyway. The additional will go straight to your principal and will significantly accelerate the payoff of the mortgage. If you were to take the fixed rate, the difference in payment would be going 100% towards interest.
You can also take it one step further and increase the payment a bit more each year. Also, this way when rates do increase, you’ll already be making a higher payment so you wouldn’t really notice the increase as you are already in ahead of it. You're already making the higher payments and are now ahead of the game. You're increasing your payments when YOU want to and not when you're forced to. This way, YOU are the one in control, not the Bank of Canada. Note that your payment will still increase further when there is a rate increase, however you can easily lower it back down to where it was before so your payment doesn’t need to change.
I’m attaching a calculator you can use to compare fixed with variable to get a better feel for it.
Hope you find this helpful.
Mortgage Broker, Author
CityCan Financial Corp (lic. 10532)