Dear Nancy,
I'm wondering what your view is right now on new mortgages - whether fixed or variable is the way to go. Studies I have read suggest variable has historically been the better deal long term. But with fixed mortgage rates so low right now, isn't it better to lock it in for five or more years? Thanks, David
Dear David,
It is true that variable-rate mortgages can have lower overall interest costs in the long run than fixed-term mortgages. What you need to assess is how are you able to financially cope if your mortgage payment increases substantially?
I would have you plan with the assumption of having a fixed-rate mortgage and see if it is financially manageable. If so, then get the variable mortgage and make the fixed rate payments. Don't just budget with the current rates of your mortgage payment. If you are worried about interest rates rising drastically, and you are looking for piece of mind, then the fixed rate may be the way to go.
I would like to point out that the variable-rate mortgages are based on the bank rate, which reflects short-term interest rates. Fixed mortgages are based on longer-term bond rates. If you are contemplating a five-year fixed rate mortgage, be aware of the trends of the bond yields and interest rate curve rather than focusing on the bank rate. Many people confuse the two.
There are a number of financial institutions that will let you choose a combination of fixed and variable portions of your mortgage. With that, you could have a portion of your mortgage with a variable rate, and another portion that is fixed. You'd have the flexibility to pay down whichever portion at any particular time carries the higher interest rates, should you want to pay off your mortgage faster.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com
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