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Toronto couple Rae Whitton and Dan Madge had the fixed-versus-variable-morgage debate when they were buying their house. (Jennifer Roberts for The Globe and Mail)
Toronto couple Rae Whitton and Dan Madge had the fixed-versus-variable-morgage debate when they were buying their house. (Jennifer Roberts for The Globe and Mail)

Fixed v. variable

Possible rise in mortgage rates pitting couples against one another Add to ...

When Rae Whitton started house shopping with Dan Madge last year, she agreed to a variable mortgage rate after their broker explained rates were likely to remain low until spring, at which point they could lock into a fixed rate.

But when February came and signs indicated the economy was getting stronger, anxiety kicked in. Ms. Whitton e-mailed Mr. Madge newspaper articles warning of possible mortgage rate hikes, and worried about worst-case scenarios, remembering how her parents paid up to 18 per cent on their mortgage.

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"I was just freaking out. Not that I think it will ever be like that again, but what if this happens? What would we do?" she said. "You always think of the worst thing."

With mortgage rates set to climb in coming months from historic lows, the emotionally charged decision to lock into a predictable fixed-rate mortgage or gamble on a variable rate that could change at any time is pitting couples against each other as they try to plan their future.

Call it the Battle of the Sexes: the Housing Boom Edition.

Ms. Whitton was terrified that rocketing rates would price them out of their new Toronto home and pushed for the certainty of a fixed-rate. Mr. Madge wanted to take a chance that rates would be lower.

"I didn't like the uncertainty of it," Ms. Whitton said. "I like knowing how much our payments are going to be every month."

The conflict is based on fear of the unknown, and the fear of losing a home if circumstances spiral out of control.

A study commissioned by the Bank of Montreal indicated that women were more likely to be overwhelmed when buying a home than men, at 44 per cent versus 28 per cent. Men were also more likely - 39 per cent vs. 26 per cent - to take interest rates into account when deciding whether to buy.

"When it comes to a risky situation which usually involves some kind of uncertainty, women tend to perceive negative consequences to be more likely and perceive negative consequences to be more severe," says Li-Jun Ji, a psychology professor at Queen's University in Kingston, Ont., who studies how decisions are made.

After debating for several months, Ms. Whitton and Mr. Madge went to the bank a few weeks ago and locked into a three-year fixed-rate mortgage. And while Ms. Whitton said she knows more of their payment is now going to interest, she's not going to let it get to her.

"I just try not to look at the statements," she said.

Variable rate mortgages can be had for about 1.75 per cent right now, while a 5-year fixed-rated can be had for about 4.5 per cent. A homeowner can save thousands by choosing variable, but their monthly payments will get higher every time interest rates increase.

With the Bank of Canada expected to move its key lending rate higher in June, the variable rate will increase as well. And if history is any indication, rates go up a lot faster than they go down. From 1980 to mid-1981, rates gained 67 per cent, making many mortgages unaffordable.

There's no sense that will happen this time, but even small increases can mess up a tight budget.

For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750.

It's that kind of uncertainty women may be hardwired to avoid, said Lise Vesterlund, a professor at the University of Pittsburgh who has studied the role gender plays in financial decisions.

"My own work has shown that women are less confident about their decisions," she said. "There are evolutionary reasons for that, and you can also argue there are circumstantial reasons as well."

She said men are natural risk-takers - after all, there was a time when they could reproduce indiscriminately and not worry about consequences, while the women had to be prudent and think about the future.

That sense of risk is still fostered by parents today, she said, with the majority of boys playing games that have measurable results while girls are offered activities that have no discernible conclusion.

"From an evolutionary standpoint, men have always had more to gain by taking gambles," she said. "Women tend not to get the same kick out of taking risks - part of the reason they like to lock in to something is they want to have more information about what their prospects will be like in the future."

Follow on Twitter: @carlyweeks

 

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