March 29 Fixed rate increase- variable or fixed now?

Submitted by Phil McDowell on Mon, 03/29/2010 - 14:13

March 29- Fixed Rate increases announced: fixed or variable, now?

4.91% has been the average prime rate based on Bank of Canada weekly statistics kept since January of 1999.

Today, prime is still 2.25% and many have questioned if taking a variable rate is still a good idea.  2.25% is the lowest recorded prime rate since 1999.  It has been as high as 7.50% since 1999.  In the early 80's it got as high as 22. 75 during a significant period of inflation fighting. The 2.25% rate is prime without any discounts or premiums the lenders may offer from time to time. 

Fixed rates as shown in Bank posted rates for five year rates have been as low as 5.25% and as high as 8.75%.   This is without discounts or premiums offered by the lenders, of course.

Today, .40% off prime is an attractive variable interest rate.    If you go by historical averages, on average your rate will be 4.51% (4.91-.40=4.51) then.   Keep in mind, to make an average the rate will be lower sometimes and higher other times.

If you are able to get a fixed rate mortgage of less than 4.51%, if history repeats itself it means you will save money.

There is one other issue to consider and that is can you afford higher payments?    A fixed rate mortgage of 4.91% with a 35 year amortisation would have payments of $495.83 for each $100,000 borrowed today.  If rates hit as high as they have been in the last ten years of history (7.5), say 7.1% with today's discount for variables, your payment will go as high as $638.67 for the same amortisaton.    That's an almost 30% increase in payments.   Will your income cover that kind of increase?

There is still a big gap between variable rate mortgages and fixed rate mortgages.  Variable rate mortgages often allow you to move to a fixed rate mortgage of equal or greater fixed rate terms at any time.   But, as we have just seen, fixed rates can move independently of variable rate changes.  If fixed rates go up sooner, it becomes harder to protect your self from higher costs.