Fixed or variable, what’ll it be?

Four questions to ask yourself before choosing between a variable and fixed rate mortgage.



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With mortgage rates poised to go up—how much longer can this last?—the big question on people’s minds is this: Should I take the lower variable rate and the savings that come with it, or lock in now for the long term?

The decision looks like it requires a crystal ball on where rates are going. But it doesn’t. It’s a much more pragmatic decision than it at first seems, with a checklist of things that will naturally guide you to your answer.

1. How’s your income and is it stable? If you’re taking a mortgage that’s tighter than Cinderella’s shoes on her ugly step-sister’s feet, you’ve got to lock in the payment you can manage for as long as possible. Ditto if there’s any potential instability in your income stream. If you’ve got a steady income and wiggle-room in your cash flow, the variable rate might save you some money.

2. How high is your debt ratio? If your debt ratio is high because you’re carrying all kinds of other debt—student loans, a car loan, credit card debt, a line of credit, consolidation loan—then any significant jump in the prime rate will leave you feeling like Hulk Hogan is squeezing the life out of you! You’ve not only got to go with a fixed rate, you’ve got to make a plan to get the hell out of the ring!

3. How much do you have socked away? If you’ve got a big enough emergency fund—a minimum of six months’ essential expenses—you’ll have the buffer you’ll need to deal with a rise in interest rates. No emergency fund? Go with a fixed rate mortgage.

4. How well do you sleep at night? Not everyone has the stomach to watch the markets and deal with the anticipation of things changing. If you have the time and the temperament to deal with the interest rate rises and falls, you’re a good candidate for a variable rate mortgage. Otherwise, stick to a fixed rate.

4 comments on “Fixed or variable, what’ll it be?

  1. Hmm – the question I get people to ask themselves is : if you go with a variable rate, are you prepared to go with payments equal to what your payments will be if interest rates go up by 3%? If so, you'll be taking advantage of the decreased interest rates right now, and be able to handle a fairly substantial increase in interest rates. If you can't commit to making those payments now, then how on earth do you think you'll manage to do it if interest rates go up in the future?


  2. There are advantages to both types of mortgages. However in the case of choosing a variable you may actually have no choice. When qualifying, you must be qualified on an interest rate of 5.14%. If you are carrying a lot of debt already you probably would not qualify and would have to take the fixed rate which to-day qualifies on a much lower rate.
    With low Canadian inflation, a world-wide financial mess and a new Canadian Bank of Canada Governor coming in, the variable rate will probably stay the same until at least the beginning of 2014. If you can qualify for the variable it is a great chance to pay down the principal faster than if you had a fixed rate. You essentially can afford the payments until a rate of 5.14% is reached. You can also switch over to the fixed if you need to so there is a safety net there.

    Ultimately the choice comes down to the consumer to make the choice that they are moist comfortable with and can live with..


  3. Don't know why anybody would go with a variable rate in the current environment. With interest rates so low, why get greedy? You can get a 7 or even 10 yr fixed rate at 0.5-0.7% higher than the variable rate at most institutions. I'd say lock it in right now.


    • I completely agree with you, Allan. Back when I switched my mortgage from fixed rate to variable rate, I dropped my interest rate by several percent. Continued making the same payments (or more) than I had been making before, and saved tens of thousands of dollars in interest by the time I paid off my mortgage, several years later. At that time, and with my financial situation, it made perfect sense to go variable rate. Now, the up-side potential is pretty limited, and the risk of variable rates going up over the next 5 or so years is not at all remote.


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