That old fixed vs. variable debate

The biggest purchase most Canadians ever make is a home, and financing  that purchase with a mortgage can be a very complicated proposition.

For years the prevailing wisdom in selecting a mortgage has been based on a report done by Dr. Moshe Milevesky of York University.

His report is like many others in that it attempts to answer what he terms an “age-old question”: whether to take a fixed or variable mortgage rate.

“The contribution of this report is to rigorously quantify the benefit of the floating strategy,” says the report but that benefit seems about to change, forcing some homebuyers to re-evaluate their mortgage strategy.

A fixed-rate mortgage means the mortgage rate deosn;t change overthe term of the mortgage. That means the purchaser pays a set amount of interest over set number of years – say five per cent for five years. The interest on a variable-rate  mortgage fluctuates up and down with the Bank of Canada’s bank rate,making mortgage costs more unpredictable for homebuyers.


Put simply, his research indicates that a homeowner has been better off with a variable mortgage rate between 75 and 90 per cent of the time. The report has been accepted as the definitive word on mortgage choices since it was  published in 2001.

And, for that time, its logic has applied. Certainly anyone who locked into a fixed rate three years ago is cringing when they think of  how much less they could be paying today.

“People that went variable won. Why? It’s very simple,” says Ian Lee, director of the MBA program at Carleton University’s Sprott School of Business. “Mortgage rates were trending down over the last twenty years. In that instance if you lock in, you’re locking in a rate that’s higher than what you needed to lock into.”

The Bank of Canada’s bank rate has not been in the double digits since February 1991 when it was 10.02 per cent. In that time it has fluctuated, but rarely gone above seven per cent on its way to  its current record-low of 0.50 per cent.


That trend is no longer true, says Lee. Thanks to the financial crash and subsequent recession of the last two years, interest rates have plummeted as central banks try to stimulate the economy into action.

“Interest rates are at the lowest they have ever been ever,” he says. “They cannot go lower. They are almost zero now. You can’t have negative interest rates. That suggests that they’re going to go up.”

In Canada the bank rate has  come down to 0.50 per cent in the last year and a half, from 4.75 per cent in 2007.  Its all-time high  was in August 1981  at 21.03 per cent.

If interest rates go up, mortgage rates will follow. Or, as happened   in late March, Canada’s major banks may pre-empt the Bank of Canada by raising some five-year mortgage rates before  the central bank rate moves.

“I have been advising everybody that talks to me, anybody that asks me, to flip from variable into fixed,” says Lee.

The logic behind the move  is that if rates do indeed go up, there will be virtually no chance that fixed rate mortgages will be available any cheaper than right now.