The Fixed Versus Variable Rate Mortgage Dilemma

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It’s never easy to try to figure out which mortgage to pick. It doesn’t help with stories in the news saying that variable is better than fixed, 18 years out of 20. You just don’t know when you are in the 2 out of 20 years where you’re better off going fixed!

Right now, the 1 or 2 years fixed rate mortgages can be had for less than what you would pay on a variable rate mortgage. To me that option makes the most sense because you want to get the cheapest money that you can in order to pay down the principal as quickly as you can (some would disagree with me about paying down principal when you can earn more in other investments at the moment, but that’s a whole other argument). I am of the belief that a mortgage is something you want gone and getting the best possible rate helps you achieve that.

Right now the discount available below prime on a variable mortgage is only so-so. When rates were a little higher you could get a variable at prime minus 0.9%. Right now it’s somewhere around prime minus 0.55%. if interest rates go up, then I suspect that the banks would start offering a bigger discount below prime. So if you take the one or two year fixed and the prime rate has gone up by the time the mortgage is up for renewal, you have potentially come out ahead by being able to renew into a variable with a better discount. So, if shorter term fixed rate mortgages are available at or below what you’d pay for a variable mortgage, that seems the most sensible option right now. It is highly unlikely that the prime rate will drop any further, though many people have been proven wrong on that prediction over the past couple of years.



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