• FIXED OR VARIABLE – WHICH SHOULD YOU CHOOSE?

  • The week before last, I was at the CAAMP (Canadian Association of Accredited Mortgage Professionals) Mortgage Symposium. The event happens once a year and highlights what happened in the mortgage industry in the previous year and talks about the upcoming year and what we should expect.

    It became very interesting when the economist #Ted Tsiakopolous from CMHC got up to speak. He spoke about the Canadian real estate landscape and provided statistics. One statistic that was very surprising was the fact that only 30% of mortgages in Canada are variable rate mortgages. So I thought this would make an interesting post.

    The first thing to note is the differences between fixed and variable mortgages.

    Fixed rate mortgage – A fixed rate mortgage is a mortgage where the rate of interest and payment are fixed for a specific period of time. Generally known as the mortgage term, it usually ranges from between 6 months and 10 years. As time goes on, more of the mortgage payment goes towards the principal and less of the payment goes to the interest. Furthermore, the fixed rate mortgage is based on the bond yield so as it rises, so do the fixed rates.

    Variable rate mortgage – A variable rate mortgage is a mortgage where the interest rate fluctuates with any changes in the lenders prime rate. If interest rates go down, your mortgage payment will go down, but if rates go up, your payment goes up. With some variable rate mortgages you can fix the payment and as long as rates stay below that required payment it will not change. If rates rise high enough that you are not covering the necessary payment, your payment will be increased.

    The important thing to note is that qualification differs between fixed and variable and thus this is why it is only at 30% variable mortgages vs. fixed mortgages in Canada.

    In a fixed mortgage, you will qualify at the 5-year fixed rate, which today is 2.74% and a 25, 30 or 35 year amortization. The important thing to keep in mind is that with less than 20% down, you cannot qualify for an amortization greater than 25 years. The benefit of course with a lower amortization is that you incur less interest over the life of the mortgage.

    Conversely in a variable mortgage, you must qualify at the benchmark rate otherwise known as the Bank of Canada qualifying rate, which is currently 4.74%. if you remember only a few short weeks ago, the BOC rate fell 5 basis points after oil prices also tumbled. Of course, this is not the only reason but that is for another post!

    So which should you choose? Unfortunately it might not be up to you if your GDS (Gross Debt Service Ratio) and TDS (Total Debt Service Ratios) are not in line for qualifying for the Variable rate. Most “A” lenders look for a ratio of GDS – 32% & TDS-40%. “B” Lenders are more flexible but you will incur higher rates.

    When I do a purchase analysis for my clients, I look at both options and present the pros and cons of both fixed and variable. I take into account my clients current monthly obligations, their current lifestyle and what they can afford. Fixed or variable, it comes down to affordability and qualification.

    Don’t forget if you, a friend or family member have any questions about mortgage financing I’m here to answer those questions and to work with you to arrange the best product to fit your specific needs and comfort levels.