In my last post, I talked about how much of an effect a rise in interest rates will have on a variable rate mortgage, but this brings up a good question, if you are in the market for a mortgage, should you get a variable or a fixed mortgage rate? There are three steps to figuring this out.
Step 1: Determine your risk tolerance
It really depends on how much risk you are willing to tolerate - there is no one size fits all. With a fixed mortgage rate, you are locking in to a specific rate for a fixed term (generally five years). No matter what happens in the market during those five years, your mortgage interest rate will remain unchanged. On the other hand, a variable mortgage rate will change with the markets - if the prime lending rate increases, your mortgage rate will increase, and vice versa.
In my case, I have no dependents, no debt (other than a mortgage), and a stable job. In other words, I wasn't staying up at night wondering how I'm going to pay my bills; a perfect candidate for a variable rate mortgage. On the other hand, if you are constantly worried about money, and the thought that your mortgage payment might increase within six months causes your hair to turn grey, a fixed mortgage might be more your speed.
If you are having trouble figuring out what your risk tolerance is, there are a ton of checklists on google to help you out.
Step 2: Understand the true cost of a fixed vs. variable mortgage
- The average Canadian can save up to $20,630 by picking a variable over a fixed mortgage 90.1% of the time
- Variable mortgage rates typically let people reduce their amortization period by at least a year
- It is impossible to predict long term interest rates
Dr. Milevsky's conclusion is that in the long-run, variable rates are less costly if you can stomach the risk. However, there are pros and cons to each (right now fixed rates are attractive because the rates are really low), find yourself a good mortgage calculator and figure out some scenarios of how much the various mortgage types will cost, but remember, you need to pick the rate type you are most comfortable with.
Step 3: Negotiate, negotiate, negotiate!
Finally, no matter what type of mortgage you select, don't forget, you need to negotiate for a better rate! Shop around at the various banks, credit unions, and mortgage brokers to get the best rate possible. When you find the best rate, go back to everyone you talked to and tell them the amazing rate you got - you'd be surprised how often someone will offer to match, if not beat the "best rate". Everyone wants your business, and it's up to you to play hard to get!