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We just bought our first house and are contemplating fixed vs. variable. Our broker is really pushing for variable but we're just not sure. I know interest rates will probably be creeping up soon, but will they creep up so fast that we'll be in trouble with our monthly payments? Our situation is that we are earning a fixed income right now that will likely double or triple in two years time, so we know we could afford higher payments in 2 years, but the question is how much are things likely to change before that?

  • Related: basicallymoney.com/questions/1546/… – Chris W. Rea Apr 29 '10 at 2:40
  • How long do you plan to stay in the house? If you know you're only going to live there 5 years and the variable is fixed for five years, then the variable makes more sense. (Yes, things can change, you may end up staying longer, but all else equal, it is something to consider.) – bstpierre Aug 5 '10 at 0:19
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Many experts believe the Bank of Canada will start increasing its Prime rate in the near future by approximately 25 basis points. If you're in a financial situation where an increase in monthly payments is going to be tough for you to handle, it's probably wise to lock in now.

Of course you also need to consider how much you are putting down and what your amortization is. Banks make money based on how long you take to repay the debt not on the rate. My advise is to fix your mortgage payment but make sure the mortgage broker has secured for you has some flexibility on the pre-payment privilege. You want to know how you can make some lump sum payments to the debt as funds become availble. You can always reach me if you have any more questions at www.mortgages4women.ca. Enjoy your new home!

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If a broker is pushing variable rates in this period of historic lows, I'd find another broker. Of course nobody can predict which way interest rates will go, but at the moment they have a lot more room to go up than down and have been slowly climbing over the last month. A variable rate mortgage will likely have a lower rate than a fixed rate mortgage, at least initially. So the question is: are you willing to bet that the up front savings (with the lower initial rate) will offset a potentially higher rate in the following years? If rates rise steadily and you own the home for a long time, chances are a fixed-rate would have been a better deal.

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I've preferred having a variable-rate mortgage for the last 8 years. Rates were generally declining and I've saved considerable money as a result. But, I don't recommend going into a fully variable rate mortgage at this time. I don't think rates will continue to decline or stay this low for much longer. Rates are already at or near historical lows! Refer to Canadian Mortgage Trends - Fixed or Variable? Updated Perspectives:

Dr. Milevsky found that 77%-90% of the time people pay less interest over the long-run by choosing a variable-rate mortgage.
...
“In the original study we never said that floating your mortgage is better 100% of the time." There have been “periods of inversion” where fixed rates were actually lower than variable rates. Indeed, the original study found that 10-12% of the time it pays to be in a fixed rate, “and this might be one of them" he says. ...

... and it was Moshe Milevsky's book "Money Logic" that originally convinced me to go variable. But, at this time a fixed rate might be a better bet.

Even so, if you still want to consider variable rates at all, ScotiaBank has an interesting product: The Long and Short mortgage. They give you half of your mortgage at a fixed rate and half at a variable rate. Other financial institutions may be able to arrange something similar, perhaps.

So, I suggest go entirely fixed, or go for some kind of combination only if you want to hedge your bets and take a chance at saving some money. An entirely variable rate mortgage, at this time, isn't as attractive as it used to be, and may keep you up at night.

Whatever way you go, make sure you negotiate a good rate, and as Marcy pointed out, pre-payment privileges and other features of the mortgage are important too.

  • I bought my house in 2004 on a 5-1 ARM. At the time, I didn't really know much and figured that I wouldn't be in the house past 5 years. I had considered a refi before the 5 years was up, but a mortgage broker told me that if I was thinking of moving in the next few years, I would do better to stay variable. It has paid off for me. But I my next mortgage will be fixed. – jessegavin Aug 11 '10 at 20:55
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If you can't afford higher payments in the future then fixed is the way to go. Especially now when rates are at historic lows I wouldn't bet that they will go lower.

Variable rate mortgages make a lot more sense when you only expect to be in the house a short time. I'd definitely go fixed if you expect to live there more than 5 years.

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    +1. I have heard the fewer than 5 years argument, but I would counter if you are planning less than 5 years, strongly consider not buying a house and just keep renting. – MrChrister Apr 13 '10 at 17:05
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I would advise Fixed Rate because I'm very risk averse. If you have a variable rate mortgage and the rate goes from 4% to 10% can you still afford it? Also I just like being sure of how much I need to budget for my mortgage from year to year, instead of depending on the waxing and waning of interest rates I have no control of.

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You are the buyer, you don't have a broker. They work for the seller. (90% of the time). If you are using a buyer's broker, you should fire him/her.

That broker (this is not an indictment of all brokers) is pushing you to buy more house than you can afford. Look at any rate chart, rate literally have nowhere to go but up. If you are so confident in your jobs, and future earnings increases, I'd not argue against the highest 30yr mortgage you can qualify for, as your raises kick in, you'd be fine. But consider, most variable rate mortgages have a cap that's 6% above their starting rate.

If you let us know what exact term you are seeing we can offer more/better comment. Remember though, that broker has one goal and it's not aligned with yours or mine.

Added - What is the maximum the ARM can go? It's called a rate cap, and can be as simple as 2%/yr with a maximum of 6% increase, or something more complex. What is it based on? I recall ARMs frequently being 1 yr T-bill + 2.75%. That would be 3.25% now, with a cap of 9.25 if rates go crazy. You can still get a 30 yr fixed at 5%. Why pay more now? So the risk is the bank's, not yours. If you take the fixed, you might be paying 5% in 10 years while the bank is paying 6% on CDs. The broker is not a financial adviser, he's selling a product and does not have your best interest in mind. Can you tell us the rates/ terms you are considering?

  • I assumed she meant mortgage broker, but if it's a real estate broker pushing for a variable rate mortgage, you're exactly right. – cabbagecalculator Apr 13 '10 at 21:22
  • Didn't think of that. Good point. Mortgage brokers were part of the problem that created the housing bubble and crash. They get a bigger cut on the variable mortgage. I'll stop before I type something I'll regret. – JoeTaxpayer Apr 13 '10 at 21:41
  • Brokers really work for themselves. They have cars, houses and families too. I don't blame a broker for selling you a worse deal that profits them (they gotta get theirs), but I do think asking this questions to impartial people will yield something to think about. Don't benefit them to detriment yourself. – MrChrister Apr 13 '10 at 22:25
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    Yes, I'm talking about a Mortgage broker. Basically his view is why pay extra now if we don't have to? Our jobs are secure and we are definitely in for pay increases in two years time. We could still afford the variable rate even if it went up by 2%, but the question is would go up to 5, 6 or 7% in the next 5 years? Then we would be in trouble! – Larissa Apr 13 '10 at 22:28
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    Exactly, and chances are, banks are offering the broker a higher commission because they will make more money if you're paying them 5,6,7% in the future. – cabbagecalculator Apr 14 '10 at 0:27
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When it comes to buying a home, I strongly recommend going with a fixed-rate mortgage. Counting on income increases that haven't happened yet in order to afford what will probably be your largest monthly expense is risky. Even if the raises do come through, what if something else happens that requires you to lay out a big chunk of cash.

With a fixed rate, you know how much you're going to spend on housing for the long-term. This is important with such a large expense because you'll have a much easier time budgeting for your other financial goals.

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