Fixed Rate or Variable Mortgage, that is the question...!

Well, our crazy marketplace has continued to present weird and whacky scenarios.  We had falling home prices and higher interest rates, but that turned into low housing prices and lower rates.  Now we have low house prices and rising interest rates...what's going on?  But wait, it's not all the interest rates, it's only the FIXED rate mortgages--what's with that?

As we detailed several weeks ago, fixed rate mortgages--where the payment nor the interest rate change for the term of the mortgage, and variable rate mortgages--where the rate and payment will flucuate with prime over the course of the mortgage, operate somewhat independently.  As writer Gary Marr describes in today's Financial Post there are incredible advantages to having a  variable rate right now.  There is as much as a 2% spread between the five year fixed rate and the variable rate. 

This difference makes a huge difference in your payment.  In Alberta, the average mortgage size is $225,000.  If your fixed rate is at 4.49%, your payment is $1244.  If your variable rate is at 2.65%, your payment is $1024.  That's a difference of over $200 each month.  Very significant!

So why are people choosing a fixed rate over a variable  rate  right now?  People are understandably fearful that with this current economic downturn we will see a huge inflationary rebound, causing interest rates to spike.  Now this may be, but it will have to be tempered by all the other global economic factors which play into this, as well as government's interventions onto the economy.

What are we telling our clients?  We are suggesting that if you can handle the minor flucuations which may occur in our economy at the moment, history shows that a variable rate mortgage is always better than a fixed rate mortgage.  If your cash flow is tight, and you don't want to see any changes in your fixed costs each month, go with the fixed rate mortgage.