Float or Fix – the Mortgage Dilemna

The Canadian Press recently published an interesting article called ‘Float or Fix’ – a look at the decision homebuyers face in choosing a fixed or variable mortgage rate. With the recent interest rate hike by the Bank of Canada, and several more called for in the coming two years, the question becomes ever more pertinent.

How to choose?

There are several points to consider. First, while fixed rates tend to be higher than variable rates, they offer a measure of security by being predictable. For first-time homeowners with small down payments, predictability can save a lot of sleepless nights.

While variable rates can offer lower interest payments in the short-term, they will go up as the prime rate goes up, which is virtually guaranteed over the next two years as the Bank of Canada tries to counter inflation. So while the rate might be low today, it can change, and fast. If you are willing to accept the volatility, you must have a budget that can stretch to accommodate higher monthly payments.

However, in the long term, experts say variable rates do cost less – as counter-intuitive as that may seem.

“If you can afford to, and are okay with your rates changing . . . in the long run you’re better off with a variable rate mortgage,” Gregory Klump, chief economist of the Canadian Real Estate Association, told the Canadian Press.

He also suggests that those who need certainty in their mortgage payment get a pre-approved mortgage (which is guaranteed up to four months), so that if rates change between approval and signing, they get the lower of the two.

Other tricks suggested by Moshe Milevsky, finance professor at York University and executive director of the Individual Finance and Insurance Decisions Centre, include splitting the mortgage in two, taking a fixed rate on one part and a floating rate on the other.

For the expert mortgage shopper, he suggests a more complex strategy:

“Get a pre-approved fixed rate mortgage, guaranteed for up to four months. Then get a floating mortgage with the option to pre-pay the whole thing off without penalty. Follow the Bank of Canada and the bond market.

“If rates increase, move the mortgage to the bank which you gave the pre-approved rate. Otherwise, do nothing and start the process over in a few months,” Milevsky wrote.

“Understandably, the bank manager might get a bit weary of your constant requests for pre-approval.”

Finally, mortgage shoppers should remember that they can almost always get a discount on the posted rate, by a full percentage point or more. The home financing business is a business, after all, and there is room to haggle.