FIXED OR VARIABLE: a personal choice

By Jessica Magno

Mortgage rates in Canada have been at record lows the past few years, with the variable rate much lower then the fixed. Rates are slowly beginning to rise as predicted by economists and we will see an increase in both variable and fixed over the next few years.

There is a tendency for those who are currently in a variable-rate mortgage to lock in to the best five-year rate available today when we start to see an increase in the prime rate in the latter half of 2011.  At the time of writing, the prime rate was 3% and the best five-year rate mortgage was 4.05%. A recent TD Economic report suggests that prime would go up by 1% by the end of 2011 and they anticipated a further 1.5% increase by the end of 2012.  Until the U.S. and global economies start to show signs of sustained growth, the Bank of Canada will be limited in terms of how much they can raise rates – not to mention the impact on the Canadian dollar from higher rates. So there will be a slow yet steady rise of the variable rate in the next few years.

Historically in Canada, anyone who has taken the variable-rate mortgage over the fixed-rate mortgage has been further ahead 88% of the time over the last 20 to 30 years. That starts the question now that we have just come out of historically low rates as a result of the global recession – are we now in that ‘12%’ period of time where it makes sense to choose a fixed rate?

At the end of the day, the numbers do not lie. Let’s assume that the prime rate in Canada will double to 6% over the next five years. I then compared a client with a $300,000 mortgage and 25-year amortization who locked in today for a five-year mortgage at 4.05 to a client who chose to float in a variable rate at prime minus 0.75%. Keep in mind, the monthly payments the same for both clients and compared where they were at the end of the five years.

The client who chose to stay floating at prime minus 0.75% over the five-year period ended up saving over $5,000, even though their interest rate at the end of the five-year term was 5.25%.

If you are looking to save the most money on interest over the next 5 years then variable is what is predicted to be the best route. It is a gamble, but given the history and the math I like to think of a variable rate mortgage as a sure bet. For those who are not the gambling type and like to sleep at night, then I always recommend the safety net of a 5 year fixed mortgage. To go fixed or variable on your mortgage is a personal choice. 

Jessica Magno is the Manager, Residential Mortgages for TD Canada Trust and is now a regular contributor to the Muddy York Real Estate Blog.  Jessica can be reached 416.880.7065 or via email at


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