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Fixed Rate or Variable Rate?

General Vivian Pritchard 17 Oct

The premium on fixed mortgage is very small
For most of the past year, Canadians have leaned very heavily to variable-rate mortgages. Earlier this year, five-year variable mortgages were being offered at rates as low as prime minus 0.95 per cent (2.05 per cent at current prime rates). With the latest financial worries, lenders have raised variable rates. It is now difficult to find better than prime minus 0.25 per cent on a five-year variable mortgage. At today’s prime rate, this translates into 2.75 per cent.

Traditionally, a five-year fixed-rate mortgage would be 1 per cent to 2 per cent higher than the five-year variable rate, depending on the prevailing yield curve. The yield curve shows the difference between short-term rates and longer term rates.

Today, if you can get a variable rate mortgage for 2.75 per cent, and a five-year fixed at 3.25 per cent that is just a 0.5-per-cent premium. That is a steal on a historical basis.

Now factor in the fact that today’s prime rate is among the lowest in history and there are very few people who believe that interest rates will be the same or lower three years from now. If ever there was a time to take a hit of 0.5 per cent (on the front end) for the benefit of having a locked in rate for five years, today might be the day.