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More Canadians Choosing Fixed over Variable – and They Should!

27 December 2012

Interest rates have been at historic lows for over two years. This has led to a flurry of mortgage activity with people refinancing to get that better rate, renewing with new lenders that will give them a better rate, and going back to the old debate of fixed versus variable mortgages. So which one should you choose? Should you ditch your current mortgage now before rates go up just to get that fixed rate? Or, like Amanda Lang has recently suggested, should you do both?

Canadian Mortgage Trends brought up a comment that Lang made on “The Lang and O’Leary Exchange,” last week. She stated that in essence, homebuyers – especially those that are well off – should use a variable rate now, and then switch to fixed right away.

“Some people can forecast rates and arrange their affairs accordingly,” said Lang. “Rates won’t gap up. They will climb in some orderly fashion. It’s very rare to see a multi-move up or down with interest rates. People of means can actually take their time and then still lock in with plenty of time to get a decent longer-term rate.”

But, just how wise is it to use this strategy?

It’s not. Unless you have been playing around with your interest rate regularly over the last couple of years (renewing, refinancing, etc.) or you are a highly seasoned investor, it’s incredibly difficult to predict interest rates. Lang is probably right when she says that interest rates aren’t going to skyrocket when they do eventually rise.

CMT points out themselves that in the past 20 or so years, there have been four instances when interest rates have gone up – way up. Twice was in the 90s, first when prime shot up 425 basis months in just over a year; and then in ’97 when it rose 250 basis points in one year. Prime can also fall just as drastically as it can rise, as it did in 2000 when it fell 375 bps in just over a year; and again in 2007, at the height of the crisis, when it fell 400 bps in 17 months.

No one knows what’s going to happen with interest rates. And given everything that goes into the decision of what prime should be – the global economy, the domestic economy, household debt, etc. – it’s just too hard to predict.

Yes, for the short while that you have that variable rate, you will probably see a slight saving. And if you can manage to lock in that fixed rate in time, you will also get the best of both worlds. However, if you make even one misstep along the way, you’ll be one of the individuals that’s hit very hard by those rates when they do eventually rise – no matter how much they increase by.

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