Fixed or Variable? The Question People Love to Ask

Last Updated on November 10th, 2017

by David Larock

At the root of every borrower’s search for the right mortgage product is the fundamental question, “Should I go fixed or variable?” In their quest for the answer, people will read economic reports, consult their finance friends, search the business section or ask any number of other experts or gurus for the answer to this all important question. For people who ask me, the answer is simple:

There are only ever two factors at play when deciding whether you should choose a fixed or variable rate product: fear and greed. Borrowers must weigh their fear that rates will go up against their greed for lower interest costs. It’s that simple. We can talk about which way interest rates are likely to go, but if anyone knew for sure they would already be sipping Mai Tais on their private island in the South Pacific. The bottom line is that your decision about whether to choose a fixed or floating rate is fundamentally a reconciliation of your sense of fear and your instinct toward greed.

If fear governs your decisions, then the potential savings of a rock-bottom variable rate are not worth giving up a good night’s sleep worrying about whether your mortgage payment will increase. Fear is good. It keeps you in your house, it gives you predictability, and the cost of insuring against rate rises has never been cheaper. For

certain borrowers, fear really should be their governing instinct, and a good mortgage planner will tell you this. For example, first-time home buyers who are stretching their means or people with very fixed incomes shouldn’t be taking interest rate risk. “But what if rates stay low?” you ask. “Weigh the risks,” I say. If rates go up, you could lose your house; if rates stay down, you have effectively paid for insurance you didn’t end up needing. Put in a different context, when you buy fire insurance, you don’t feel as though you made a bad decision if your house doesn’t burn down. It’s the same idea when you opt for a fixed rate. You’re buying insurance against the pain of rising rates, and if in the end rates don’t go up, it still doesn’t mean that you made the wrong decision.

If greed is your primary instinct, then paying a dollar more than the lowest rate costs you more sleep than worrying if your payment will go up. And the stats are on your side, since historical comparisons of five-year fixed versus floating rates show that in the vast majority of cases you would have saved money by choosing variable over fixed. (Click here for a very good report on this topic, done by Moshe A. Milevsky, a professor of Finance at York’s Schulich School of Business.) The greedy among us would also point out that even if rates go up, they have to go up quite a bit (and early in the term) for you to be worse off. Choosing a variable rate product is an excellent option for borrowers who have built up equity in their property, who have enough income to withstand a significant increase in rates, and who have the discipline to put aside the extra money they are saving with the lower rate. For those of you who do choose a variable product, make sure you partner with a mortgage agent who will keep an eye on your mortgage after it funds. This will help you stay informed about what rates are doing, and it never hurts to have an expert in your corner.

So when the real estate section is calling and you’re trying to decide whether to choose fixed or variable, instead of scouring the business section for unreliable interest rate forecasts, look within yourself for the answer to the pivotal question of whether fear or greed is your governing instinct.

David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.