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October 18, 2021

Is a variable mortgage still the way to go?

Is now the time to lock in your mortgage? Some people certainly think so.

AdTraditionally, a five-year fixed-rate mortgage would be 1% to 2% higher than the five-year variable rate, depending on the prevailing yield curve. Today, you can get a five-year fixed mortgage for much lower than that. 

Most studies says that variable-rate mortgages have worked out to be better than fixed-rate mortgages over the past 25 years. And the difference was fairly dramatic, saving consumers thousands in potential interest costs. But is this likely to be the case going forward?

Maybe not, says Rob McLister, who tackles the issue head on this week on his excellent Canadian Mortgage Trends blog. Read his rationale here.

Aggressive brokers are selling five-year fixed rates at 3.25% or less. That’s an unusually low half a percentage point premium compared to a variable choice and "a spread that tight doesn’t come around often, and it makes you rethink all of the research suggesting variables are the way to go," he says.

It's difficult to see how rates can go much lower. The most we can realistically hope for is an extended period of horizontal rate movement. Which means, according to BMO Capital Markets economist Benjamin Reitzes that "going forward, borrowers won't see the same advantage to variable rates as they have in the past 25 years.”

Despite history, if the Bank of Canada's next rate move is up (which is the highest probability outcome, say most economists), the boring old 5-year fixed could certainly outperform and would help a lot of people sleep better at night, he maintains.
Are you grappling with the mortgage rate dilemma? What choice are you leaning towards and why?
By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...