Fixed Mortgage or Variable Mortgage? What’s the best decision?

Fixed mortgage or variable mortgage? When it comes to purchasing a home, one of the biggest decisions borrowers need to make is whether to choose a fixed rate mortgage or a variable rate mortgage. In British Columbia, with variable mortgage rates potentially at a peak and fixed rates having recently retreated, this decision is becoming even more critical.

At present, variable-rate mortgages are priced well above their fixed-rate counterparts, with a spread of more than a full percentage point. As a result, most borrowers are now leaning towards choosing a fixed-rate mortgage, which currently offers more stability and predictability in terms of monthly mortgage payments.

For well-qualified borrowers considering a fixed-rate mortgage, most are likely better off committing to a shorter, more flexible term. This approach is recommended by Rob McLister, editor of MortgageLogic.news, who believes that committing to a five-year term only makes sense for those who are extremely uncomfortable with rate volatility and/or unequipped to handle any additional rate increases.

On the other hand, variable-rate mortgages generally entail a lower three-months’ interest prepayment penalty should the borrower break the mortgage early. Additionally, variable rates have historically outperformed fixed rates 88% of the time, according to research by Moshe Milevsky, a professor of Finance at York University.

However, the recent sharp series of rate increases in the postwar era, which are expected to continue in the coming year, has raised the question of whether it is worth paying a premium today on the bet that variable rates will come down over the next five years.

Key Momentum Mortgages Ltd. believes variable rates need to be lower than comparable fixed rates in order to justify the added risk the borrower is taking on. He also reminds borrowers that if the Bank of Canada raises its benchmark rate any further, anyone getting a higher-priced variable rate today will potentially be paying even more in interest than had they taken a fixed rate, with no guarantee as to the timing that rates will begin to fall.

In conclusion, choosing between a fixed rate or a variable rate mortgage is a critical decision that should be made based on individual circumstances and preferences. While variable rates have historically outperformed fixed rates, the current market dynamics in British Columbia and the expectation of further rate increases in the near future make a fixed rate mortgage a more sensible choice for most borrowers. However, borrowers should consult with Laura Mackie, Key Momentum Mortgages Ltd., or financial advisor to discuss their options and make an informed decision that best suits their financial goals and risk tolerance.