{"id":1125,"date":"2010-12-21T09:02:16","date_gmt":"2010-12-21T14:02:16","guid":{"rendered":"http:\/\/www.cusjc.ca\/ottawainsight\/?p=1125"},"modified":"2017-11-19T17:34:57","modified_gmt":"2017-11-19T22:34:57","slug":"that-old-fixed-vs-variable-debate","status":"publish","type":"post","link":"http:\/\/www.cusjc.ca\/ottawainsight\/?p=1125","title":{"rendered":"That old fixed vs. variable debate"},"content":{"rendered":"

The biggest purchase most Canadians ever make is a home, and financing\u00a0 that purchase with a mortgage can be a very complicated proposition.<\/span><\/p>\n

For years the prevailing wisdom in selecting a mortgage has been based on a report done by Dr. Moshe Milevesky of York University.<\/p>\n

His report is like many others in that it attempts to answer what he terms an \u201cage-old question\u201d: whether to take a fixed or variable mortgage rate.<\/p>\n

\u201cThe contribution of this report is to rigorously quantify the benefit of the floating strategy,\u201d says the report but that benefit seems about to change, forcing some homebuyers to re-evaluate their mortgage strategy.<\/p>\n

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 \u2013 say five per cent for five years. The interest on a variable-rate\u00a0 mortgage fluctuates up and down with the Bank of Canada\u2019s bank rate,making mortgage costs more unpredictable for homebuyers.<\/p>\n

TAKING A VARIABLE RISK<\/span><\/strong><\/p>\n

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\u00a0 published in 2001.<\/p>\n

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\u00a0 how much less they could be paying today.<\/p>\n

\u201cPeople that went variable won. Why? It\u2019s very simple,\u201d says Ian Lee, director of the MBA program at Carleton University\u2019s Sprott School of Business. \u201cMortgage rates were trending down over the last twenty years. In that instance if you lock in, you\u2019re locking in a rate that\u2019s higher than what you needed to lock into.\u201d<\/p>\n

The Bank of Canada\u2019s 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\u00a0 its current record-low of 0.50 per cent.<\/p>\n

RATES HIT ROCK BOTTOM<\/span><\/strong><\/p>\n

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.<\/p>\n

\u201cInterest rates are at the lowest they have ever been ever,\u201d he says. \u201cThey cannot go lower. They are almost zero now. You can\u2019t have negative interest rates. That suggests that they\u2019re going to go up.\u201d<\/p>\n

In Canada the bank rate has\u00a0 come down to 0.50 per cent in the last year and a half, from 4.75 per cent in 2007.\u00a0 Its all-time high\u00a0 was in August 1981\u00a0 at 21.03 per cent.<\/p>\n

If interest rates go up, mortgage rates will follow. Or, as happened\u00a0\u00a0 in late March, Canada\u2019s major banks may pre-empt the Bank of Canada by raising some five-year mortgage rates before\u00a0 the central bank rate moves.<\/p>\n

\u201cI have been advising everybody that talks to me, anybody that asks me, to flip from variable into fixed,\u201d says Lee.<\/p>\n

The logic behind the move\u00a0 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.<\/p>\n","protected":false},"excerpt":{"rendered":"

The biggest purchase most Canadians ever make is a home, and financing\u00a0 that purchase with a mortgage can be a<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[227],"class_list":["post-1125","post","type-post","status-publish","format-standard","hentry","category-personal-finance-2010","tag-geoffrey-ives"],"_links":{"self":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/1125","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1125"}],"version-history":[{"count":10,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/1125\/revisions"}],"predecessor-version":[{"id":4339,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/1125\/revisions\/4339"}],"wp:attachment":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1125"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1125"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1125"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}