Fixed-Rate and Variable-Rate Are Falling – Which Is The Better Option for Homeowners?

In the last few months, interest rates have been falling brought on by the economic fall out from the COVID-19 crisis.

Today, Butler Mortgage is offering a 1.53% five-year fixed rate and 1.54% five-year variable rate.

With both fixed and variable rates falling, the question is, “Which is the better option, fixed or variable?“

The answer is it depends. It’s important to choose the mortgage solution that suits your needs. 

Ron Butler was interviewed by The Globe and Mail for a recent article on Monday, September 14, 2020, by Mary Gooderham titled, “Fixed or variable? Revisiting the debate amid low rates“.

Mr. Butler stated that the differences in interest rates “are now very slim” and that, “a competitive five-year variable mortgage is 1.80 percent to 1.60 percent, while competitive five-year fixed rates are 1.94 percent to 1.59 percent so the spread between the two options is just about 10 to 20 basis points. At this point, the price advantage starts to break down. This thin margin of advantage means most Canadian are choosing fixed rates by an overwhelming margin today.”

Fixed-Rate vs Variable Rate

Fixed-rate mortgages:

The interest rate remains the same over the term of the mortgage which makes them:

• Predictable
• Easily budgeted for
• Convenient set-and-forget

Variable-rate mortgages:

There are two types of mortgages where rates vary with the market interest rate known as “prime rate”:

• Adjustable-rate mortgage – where rate auto adjusts with changes in the prime rate and maintains the original amortization schedule
• Variable-rate mortgage – where the total payment amount remains fixed however depending on if the prime rate goes up or down, the mortgage payment will go either towards interest or paying off the principal

Typically, both adjustable and variable rate mortgages offer better interest rates when compared against fixed-rate mortgages.

Still, the article stated that fixed-rate mortgages remain the “traditional go-to product” for homeowners due to reasons already noted above.

Homeowners want convenience, something they know, and don’t necessarily want to keep track of fluctuating rates. 

Those who prefer and advocate for variable-rate mortgages, however, point out that they can always switch to a fixed rate if there is a shift in the interest-rate outlook.

This brings up another important aspect of mortgages…mortgage penalties.

One thing to consider is the penalty to break each type of mortgage. 

In the article, Mr. Butler stated that “variable-rate mortgage contracts guarantee a precise penalty that is limited to three months of interest. Five-year fixed-rate mortgages can have a far more volatile and dangerous penalty, based on interest-rate differential calculations.

“Many can have brutal results with fees going as high as 4 percent of the mortgage balance — for example, amounting to $16,000 on a $400,000 mortgage.”

Despite this, Mr. Butler added, “the five-year fixed remains the run-away most popular mortgage in today’s mortgage market.”

The reality though is that many Canadians will either break or want to adjust their five-year mortgage before the term is up due to, i.e. sell the property, refinance to get access to equity, or to take advantage of lower interest rates.

It is highly advisable to speak to a qualified and experienced mortgage broker in Ontario like Butler Mortgage who can run through penalty calculations and advise on many other aspects of mortgage solutions.

Looking for Mortgage Solutions During Pandemic Times?

If you were in the process of looking to buy a home or you own a home and looking for the right mortgage solutions during this pandemic, don’t hesitate to connect with us.

We are offering historically low mortgage rates. Speak to one of our senior mortgage agents to understand where you are today and what choices you have.

Avoid a bad future financial position. Avoid confusion. Avoid headaches.

CONTACT US any time and let’s start the discussion.