Skip to main content

Household Finances Fixed vs. variable: Why this week’s BoC rate hike shouldn’t change your mortgage strategy

Robert McLister is a mortgage planner at intelliMortgage and founder of RateSpy.com. You can follow him on Twitter at @RateSpy.

Some variable-rate mortgagors are feeling a bead of sweat after today’s Bank of Canada quarter-point rate hike. The bank’s communications today suggest it’s dead set on “normalizing” rates.

Translation: Today is not the last time prime increases in this rate cycle.

Story continues below advertisement

Shrewd borrowers have chosen variable-rate mortgages for years. After all, that’s what the research supports.

Related: Bank of Canada raises key rate again, hints at more frequent increases ahead

Growing number of BMO customers betting on variable-rate mortgages

Banks raise prime rates following Bank of Canada decision

You don’t throw out a good strategy because of five rate hikes in 15 months. Variable rates have exceeded five-year fixed rates in the past, but over any historical five-year period they’ve won out “about 88 per cent of the time,” says Moshe Milevsky, author of Canada’s most cited mortgage research.

And my own simulations confirm it. The best variable rates have beaten the best five-year fixed rates throughout every rate spike since the dawn of modern monetary policy (1991). That’s not a definitive sample size, especially given that rates have been downtrending for decades. But you can’t dismiss it either.

That said, variables won’t always win. At some point, long-term fixed rates will outperform, and that someday may have already happened.

Story continues below advertisement

Had you snagged the lowest five-year fixed mortgage in August, 2017, (right after the bank of Canada’s first rate hike of this cycle when five-year fixed rates were about 2.59 per cent) you would now be ahead of someone choosing the cheapest variable at the time (1.99 per cent). That’s based on interest cost alone, not factoring in penalties or refinance costs if you broke your mortgage early.

Could this time be different for fixed rates? Maybe. Blindly expecting to win in a variable based on research is “like saying, ‘Historically, stocks beat the bonds,' ” Mr. Milevsky adds. “That doesn’t mean that every year it’s going to happen.”

Sticking to the plan, or not

For those out mortgage shopping, today’s rate hike is not a game changer. If you can find a variable rate that’s at least 0.75 per cent below a fixed, and you’re well qualified and/or aggressively pay down your mortgage, variables are still worth betting on. “The probability of winning with a variable will likely never fall below 70 per cent," Mr. Milevsky says. “The odds will still be in your favour."

And the higher rates go, the more the probabilities favour variables. That’s largely a result of the tendency of variables to revert to their mean after rising for a while.

But here’s the key to maximizing success in a variable. You must be well qualified, and you must shop rates aggressively. Settling for an average rate can be the difference between winning or losing in any rate you pick. “The bigger the rate discount [on a five-year fixed] the lower the probability” of saving more interest in a variable, Mr. Milevsky says.

Apart from that, deciding on whether to float your rate depends heavily on three things, Mr. Milevsky concludes:

Story continues below advertisement

  1. Are you renewing a mortgage or getting a new mortgage for the first time? (Mortgage experience matters, and the former can usually handle more risk.)
  2. How much equity do you have? (If you’re highly leveraged with just 5 per cent to 10 per cent down, and “every dollar counts,” fixed is usually wiser.)
  3. Do you have salary stability? (High unemployment risk, variable income, self-employment and/or income linked to real estate are all reasons to consider locking in, he says.)

Picking a mortgage term is like investing: there are no guarantees. Variable rates are ultimately a risk-return trade-off, Mr. Milevsky says, and every borrower must remember that going in. In the long run you’ll save more in a variable … unless perhaps you were lucky enough to lock in last year.

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter