A fixed rate mortgage is advised for homebuyers who are risk adverse and may have been spooked by the seemingly never-ending headlines of a “housing bubble” stemming from the 2008 meltdown in U.S. housing markets.
Reflecting on the “stressful experience” her daughter recently endured in purchasing her first home, Patricia Lovett-Reid (senior vice-president, TD Waterhouse) penned an insightful and personal analysis of Canadian mortgage and housing markets for the Financial Post.
Stressing the importance of keeping one’s perspective to her daughter, Ms. Lovett-Reid pointed out that, “Home prices across the country have grown at an average annual pace of 4.7% over the past 22 years, or just 2.4% per year above inflation.” While conceding that it is more difficult to find ‘good value’ in certain markets, she notes that “just because homes are fully priced in many areas does not mean a bubble has formed.”
Ms. Lovett-Reid points out that current rates for a five-year fixed rate mortgage (approx. 4.6%) or a closed five-year variable rate mortgage (approx. 2.35%) are far below the levels of the 1980s when interest rates were stubbornly high, and she (amongst others) had mortgages at 18%. Ouch!
Ms. Lovett-Reid concludes that variable rate mortgages are more suitable for risk tolerant consumers who may have relatively stable employment and ample home equity. On the other hand, she recommends a fixed rate mortgage – which offers both “peace of mind and a predetermined amortization schedule” – for consumers who are more risk adverse.
In the end, Ms. Lovett-Reid did not say which type of mortgage her daughter chose, but she did sagely advise her daughter, “Buy within your means. It is not worth the sleepless nights.”