# Fixed vs Variable Rate during increasing rates



## MrBlackhill (Jun 10, 2020)

Hi all,

I bought a property back in 2019 and got unlucky and got played by the market.

I bought right here when the variable rates were getting more expensive than fixed rates. Seeing almost 15* years of decreasing rates were the premium for fixed rates was never worth it, I wanted to get a variable rate but as you can see, at that pretty specific point in time, it turned out that there were no premiums for fixed rates, so I thought that maybe we were about to see rates go up a little for the first time since a long time and in doubt decided to get a fixed rate for 5 years, stupid me.



















Seems like the only few times where variable rates go higher that fixed rates, it's in sync with a yield curve inversion and then the market crash so it turns out that the variable rate was a better decision. Look back in 2007 when variable rates were suddenly higher than fixed rates... Yet it would've been such a bad decision to get a 5-year fixed rate back in 2007 when you then see how low the variable rates in 2009, 2010, 2011 were after the crash.

And now we see that fixed rates have already jumped higher as we expect the BoC to repeat 2017-2018 in 2022-2023 and start increasing the policy rate by 0.25% from mid-2022 to end of 2023 to reach back to something near 2%.

Will we ever see interest rates go back up? I mean, truly back up, higher than 2% policy rate... Inflation is here but the economic system is broken as we can't get to increase the rates anymore, we always end up at rates lower than previously.

I'll renew my mortgage in 2024 so all this will have already happen.

Back in 2020 I wanted to break my mortgage to get those low rates but obviously the banks will rip you off with fees.

So even if I expect rates to rise, I'm sure I'll renew with a variable rate and anyways I expect the market to crash hard by 2023 (but that's just a personal speculation) so we'll be back to those super low rates again. Can the policy rate go negative? Yes!

Not sure how we get out of this loop of low rates. System is broken. I won't complain though.

So... When should we buy a fixed rate? Never? Other than back in 2020...

Source for graph: Fixed vs Variable Mortgage Rates | Comparing Pros & Cons

*Obviously more than 15 years, but I meant provided by that website with data from 2006.


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## Mortgage u/w (Feb 6, 2014)

Never fixed. Always variable.

you can’t do a constant comparison in time. You have to compare the points in time where you lock in your rate. Given you need to lock in a rate at least 5 times in a typical 25 year span, it doesn’t matter which direction the rates goes after each renewal. All you need to know is that you will always pay a premium to lock in a fixed rate and can never benefit if rates drop.


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## AltaRed (Jun 8, 2009)

Some people can't budget for the uncertainty of a 'stiff' increase in a variable rate, at least not in the first 5-10 years of a 25 year amortization. They are up to their eardrums in being stretched. I don't think it is helpful to keep chortling about variable is always better for first time home buyers. It may be so in the rear view mirror but much less so with a cloudy crystal ball.


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## MrBlackhill (Jun 10, 2020)

My situation would've allowed me to deal with possible fluctuations.

If I had taken time for a bit more financial education as I did in 2020, I would've gone variable rate and I would even have expected a recession...

It's currently very frustrating to be sitting on a fixed rate at 2.99% when this whole year of 2021 the variable rate was barely at 1%.

And since I'm just starting to pay my mortgage (which I took with only 5% down payment), then that difference of 2% (3% - 1%) would've made a huge difference! 5 figures difference in a single year!

I'll be at 2.99% from 2019-2024, that will cost me a lot! I know it sounds odd to say this when rates are so low, but think about it... When rates were 6%, you would budget for it and if rates went down to 4% then interest cost dropped -33%. But when rates were 3% and drop to 1%, then interest cost 3x less, it dropped -66%!

Anyways, lesson learned...


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## Mortgage u/w (Feb 6, 2014)

AltaRed said:


> Some people can't budget for the uncertainty of a 'stiff' increase in a variable rate, at least not in the first 5-10 years of a 25 year amortization. They are up to their eardrums in being stretched. I don't think it is helpful to keep chortling about variable is always better for first time home buyers. It may be so in the rear view mirror but much less so with a cloudy crystal ball.


this is an old argument which I never agreed with. Sure, first time home buyers are more sensitive to costs. But I’m sure they can tell the difference between a fixed payment vs a variable which will be lower. Variable rates can fluctuate but a quick search will confirm that they don’t fluctuate as often as one would think. You are also warned ahead of time which direction the rate is going, allowing one to convert their rate if necessary. Now, you can argue that you risk converting at a higher rate than if you chose the fixed rate from the beginning….but if you understand that, you also understand that you’ve been saving the whole time with the lower variable rate payments.


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## Mortgage u/w (Feb 6, 2014)

MrBlackhill said:


> My situation would've allowed me to deal with possible fluctuations.
> 
> If I had taken time for a bit more financial education as I did in 2020, I would've gone variable rate and I would even have expected a recession...
> 
> ...


consider refinancing. You would have to check with your lender what a blended rate would be for your situation. You should also ask what your penalty would be should you break your term and compare how much you’d save over the remaining term with the current rates. Sometimes, the savings will offset your costs and make you save in the long run.


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## MrBlackhill (Jun 10, 2020)

Mortgage u/w said:


> Now, you can argue that you risk converting at a higher rate than if you chose the fixed rate from the beginning….but if you understand that, you also understand that you’ve been saving the whole time wi


Yes and since paying a lower rate early on is much more important than later, starting variable makes sense.

I just got unlucky and confused because at that exact moment variable rates weren't cheaper than fixed.


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## AltaRed (Jun 8, 2009)

Mortgage u/w said:


> this is an old argument which I never agreed with. Sure, first time home buyers are more sensitive to costs. But I’m sure they can tell the difference between a fixed payment vs a variable which will be lower. Variable rates can fluctuate but a quick search will confirm that they don’t fluctuate as often as one would think. You are also warned ahead of time which direction the rate is going, allowing one to convert their rate if necessary. Now, you can argue that you risk converting at a higher rate than if you chose the fixed rate from the beginning….but if you understand that, you also understand that you’ve been saving the whole time with the lower variable rate payments.


It doesn't matter whether YOU agree with it or not. It matters how naked/exposed that first time home buyer feels. There is more to life than mere dollars. It's called sleep-at-night factor when one is skating on thin ice to make ends meet.

We have millennial family members who were very aware in 2018 that the variable rate was lower but they felt they couldn't risk a variable rate that COULD go higher than the 5 year term they signed up for. I very much empathize with their dilemma...whether they are leaving money on the table or not (which they are of course). They did negotiate a lower blended rate this year for the remaining portion of the term, i.e. they were smart enough to recognize that and be proactive about it. There are very legitimate reasons why people do what they do. Don't be so callous about what may be the 'right' decision for others.


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## MrBlackhill (Jun 10, 2020)

AltaRed said:


> It doesn't matter whether YOU agree with it or not. It matters how naked/exposed that first time home buyer feels. There is more to life than mere dollars. It's called sleep-at-night factor when one is skating on thin ice to make ends meet.
> 
> We have millennial family members who were very aware in 2018 that the variable rate was lower but they felt they couldn't risk a variable rate that COULD go higher than the 5 year term they signed up for. I very much empathize with their dilemma...whether they are leaving money on the table or not (which they are of course). They did negotiate a lower blended rate this year for the remaining portion of the term, i.e. they were smart enough to recognize that and be proactive about it. There are very legitimate reasons why people do what they do. Don't be so callous about what may be the 'right' decision for others.


I understand your point and I also know family members who need this added "protection" against rising rates.

But the question was for my case and I can deal with fluctuations.

What I feel very unfortunate is that usually the less money you have, the more you'll take conservative decisions (leading to growing your wealth even slower) whereas the more money you have, the more you are able to take aggressive decisions (leading to growing your wealth even faster).

Taking a fixed rate when variable rates are lower is actually taking a guaranteed lost in the present (due to paying higher rates) in case of an non-guaranteed lost in the future (in the probable event that rates go up higher than the initial fixed rate option).


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## Mortgage u/w (Feb 6, 2014)

AltaRed said:


> It doesn't matter whether YOU agree with it or not. It matters how naked/exposed that first time home buyer feels. There is more to life than mere dollars. It's called sleep-at-night factor when one is skating on thin ice to make ends meet.
> 
> We have millennial family members who were very aware in 2018 that the variable rate was lower but they felt they couldn't risk a variable rate that COULD go higher than the 5 year term they signed up for. I very much empathize with their dilemma...whether they are leaving money on the table or not (which they are of course). They did negotiate a lower blended rate this year for the remaining portion of the term, i.e. they were smart enough to recognize that and be proactive about it. There are very legitimate reasons why people do what they do. Don't be so callous about what may be the 'right' decision for others.


If you can't sleep at night because of a variable payment, it means you took on too much debt. If you can sleep better paying a premium....well so be it. Just know that you will only sleep well for the first term of your mortgage.

No, it doesn't matter what I think. What matters is the advice I give and whether you want to take it or not. Its good advice and its ok if you disagree.


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## AltaRed (Jun 8, 2009)

It is not me that is disagreeing. It is what 'real people' taking out monster mortgages for the first time in their lives think and I don't interfere/postulate/advise on what those in my life should do. 

FWIW, I didn't think one of our family members should have taken out that 5 year fixed term in 2018 but it was not for me to opine otherwise. That is dangerous territory if it went off the rails.


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## latebuyer (Nov 15, 2015)

I'm one of those people who prefer a fixed. And its not about not having enough money its just my comfort level. I prefer for budgeting not to have my mortgage fluctuate. Still i was foolish to lock in to a 5 year mortgage. I renew next year and its not looking good. I thought variable would go up anyways with interest rates increasing.


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## latebuyer (Nov 15, 2015)

I don't know if its too late to refinance as mortgage costs are going up. The cost of my refinance is 2000 but because i only have a year left on my small $600 mortgage i won't recoup the costs. How much will mortgage costs go up? Arghh.


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## birdman (Feb 12, 2013)

Years ago when I was in the business I recall seeing a file where the borrower had a "split loan" mortgage where the mortgage was divided in more than one term. Unfortunately I don't recall the details but for some it could be an idea to divide your mortgage into say 3 different terms and different rates. eg 1/3rd variable, 1/3 for 3 yrs, and one term for 5 years. We thought about offering such a product but eventually decided against it and I still wonder why its not readily available in the marketplace.


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## MrBlackhill (Jun 10, 2020)

birdman said:


> Years ago when I was in the business I recall seeing a file where the borrower had a "split loan" mortgage where the mortgage was divided in more than one term. Unfortunately I don't recall the details but for some it could be an idea to divide your mortgage into say 3 different terms and different rates. eg 1/3rd variable, 1/3 for 3 yrs, and one term for 5 years. We thought about offering such a product but eventually decided against it and I still wonder why its not readily available in the marketplace.


That's interesting! Thanks for sharing.

I mean, why not? One could manage his risk by splitting a certain percentage of the loan to a fixed rate and the reminder to a variable rate.


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## latebuyer (Nov 15, 2015)

Sorry i see this is not the subject of the thread and i'll move it.


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## Mortgage u/w (Feb 6, 2014)

birdman said:


> Years ago when I was in the business I recall seeing a file where the borrower had a "split loan" mortgage where the mortgage was divided in more than one term. Unfortunately I don't recall the details but for some it could be an idea to divide your mortgage into say 3 different terms and different rates. eg 1/3rd variable, 1/3 for 3 yrs, and one term for 5 years. We thought about offering such a product but eventually decided against it and I still wonder why its not readily available in the marketplace.


That is a HELOC product which is still offered today. Its viewed as an 'umbrella' loan limit where you can have multiple products. Main advantage is to have an LOC in there for flexibility. 

Personally, the advantage is very minimal if not obsolete if the strategy is to save some money with rates. If that is the only goal, variable rate will do that. Having multiple products can become difficult to manage and actually cost you more should you ever break your mortgage(s). 

The greatest advantage of a HELOC is you register 1 lien and the day the mortgage is paid off, or you paid it down sufficiently, you can reborrow the money without having to requalify or reregister a mortgage lien.

In terms of saving on your costs, always choose the lowest rate available. Sometimes, 1-2 year fixed rates are just as interesting as variable rates.


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## fireseeker (Jul 24, 2017)

The best argument that I have seen for going with variable over fixed doesn't turn on rate direction or predictions. It's the difference in penalties for breaking the mortgage -- three months' interest for variable vs. an IRD calculation for fixed.

Robert McLister (Ratespy, rates.ca) frequently points out that he majority of fixed-rate mortgage holders terminate or change their mortgage before the term ends. He says the average 5-year mortgage last about 3.5 years. Few expect to break the term when they sign, but job loss, moving, divorce, health -- all kinds of life changes -- make it probable.

Better to pick a mortgage based on penalty costs then, rather than a rate prediction.


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## off.by.10 (Mar 16, 2014)

MrBlackhill said:


> Seems like the only few times where variable rates go higher that fixed rates, it's in sync with a yield curve inversion and then the market crash so it turns out that the variable rate was a better decision.


I would just like to point out that your charts can be misleading. The variable rate available on the market is not the variable rate you're paying if you signed a few years ago. The rate is made of the bank's rate and a discount. Once you've signed, your rate will change with the bank's rate but not with the changes in discount. Especially not if that discount is at some other bank.


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## MrMatt (Dec 21, 2011)

It's a risk tolerance thing.
Variable is higher risk, so it's cheaper, fixed is lower risk, so you pay a premium for that protection.

Generally variable works out cheaper, but sometimes it isn't.

I don't think either option is "stupid" it's just how much risk you're willing to take off.
I definitely don't recommend maxing out what you can afford on fixed, and definitely not variable.

I went variable for each term after my intial fixed, and it has so far worked out quite well.

But take an experiment, lets say your variable rate is 1% lower for the first 2 years, even for the third, and 1% higher for the last 2 years of a five year term. You're still ahead.


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## Mukhang pera (Feb 26, 2016)

I would like to see interest rates restored to a more "normal" 10% or so for first mortgages. No one seemed to suffer back then and it was possible to get 9% p.a. in an ordinary bank savings account.

I thought variable was my friend until circa 1980. I took out a Bank of BC (anyone remember that one?) second mortgage on my principal residence to secure a revolving LOC to allow me to pick up another couple of Vancouver houses. The line was for $120,000 at prime plus 1.75%. Started out at around prime of 10% or so. Okay. Then the Bank of Canada decided to start raising the prime rate just about every Thursday (called Black Thursday in our home). Not many Thursdays were messed. Usually an increase of .5 or .75%. Kept going to 22.75%. So I was paying 24.5%. My accountant (a CA from Israel), predicted it would go to 40%. He said in Israel there was no such thing as a mortgage because of inflation. 

One Vancouver rental property I owned at the time was with another partner in my law firm. He was more stretched than I since he owned a number of financed properties, including in Nanaimo. The place we owned together had a Fidelity Trust first mortgage against it at 10.25% and we ended up keeping it, but getting a second fixed rate mortgage on that property to allow us to pay down our credit lines. We got such a thing at a 5-year fixed rate of 23.99%. A cause for celebration! In time, interest rates started to ebb. We decided to pay it off, but the idea of paying a penalty lacked appeal. We defaulted on the loan and were happy to pay off the principal sum when the lender called the loan. 

Those were the good old days. Especially for savers. My parents bought Canada Savings Bonds one year, paying a decent 19% p.a. And that was back in the days when all Canadians were entitled to a $1,000-a-year interest income deduction on taxes. Remember that one, and all the others we have lost?


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## MrMatt (Dec 21, 2011)

Mukhang pera said:


> I would like to see interest rates restored to a more "normal" 10% or so for first mortgages. No one seemed to suffer back then and it was possible to get 9% p.a. in an ordinary bank savings account.


We have trouble now attracting funds to invest in Canada, boosting interest rate sky high is only going to make things harder for companies to attract capital and grow.


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## Mortgage u/w (Feb 6, 2014)

Mukhang pera said:


> I would like to see interest rates restored to a more "normal" 10% or so for first mortgages. No one seemed to suffer back then and it was possible to get 9% p.a. in an ordinary bank savings account.


Mortgages weren’t $800,000 either. Also as you pointed out, there was a high return on savings accounts, something we haven’t seen in many years.


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## Mukhang pera (Feb 26, 2016)

MrMatt said:


> We have trouble now attracting funds to invest in Canada, boosting interest rate sky high is only going to make things harder for companies to attract capital and grow.


Well doggone. I was trying to curry favour with those on CMF who have been saying for years that rates need to be increased, that low interest rates are the root of all evil, starting with high house prices.


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## MrMatt (Dec 21, 2011)

Mukhang pera said:


> Well doggone. I was trying to curry favour with those on CMF who have been saying for years that rates need to be increased, that low interest rates are the root of all evil, starting with high house prices.


Oh rates need to be higher, these low rates are very harmful.
But raising them will cause some problems as well, substantially higher, like 10% would be very damaging.


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## hfp75 (Mar 15, 2018)

As long as rates are always dropping then yes a variable is better, there are times where it seems that rates could rise and people lock in - its not a bad idea if rates were to rise to secure the lower rate for a 5 yr period...

These days with glabalism and long term deflationary forces, I'd choose a viariable. Our whole society has never seen inflation or rising rates. I would hazard that if inflation were to come, people in variables, might want to shoot themselves in the foot.


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## AltaRed (Jun 8, 2009)

Anyone who is at least 65 years old has witnessed high interest rates so it is not all of society. I do agree anyone Gen-X and younger has not got a clue what that means.


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## Mortgage u/w (Feb 6, 2014)

hfp75 said:


> As long as rates are always dropping then yes a variable is better, there are times where it seems that rates could rise and people lock in - its not a bad idea if rates were to rise to secure the lower rate for a 5 yr period...
> 
> These days with glabalism and long term deflationary forces, I'd choose a viariable. Our whole society has never scene inflation or rising rates. I would hazard that if that were to come, people in variables, might want to shoot themselves in the foot.


when a 5 year fixed term is up, the renewal will be high too.


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## Covariance (Oct 20, 2020)

hfp75 said:


> As long as rates are always dropping then yes a variable is better, there are times where it seems that rates could rise and people lock in - its not a bad idea if rates were to rise to secure the lower rate for a 5 yr period...


Sufficient but not necessary. Generally the yield curve is upward sloping whereby the short rates are less than the long rates. So even if the curve is stable the variable/short term rate will be better.


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## off.by.10 (Mar 16, 2014)

hfp75 said:


> These days with glabalism and long term deflationary forces, I'd choose a viariable. Our whole society has never scene inflation or rising rates. I would hazard that if that were to come, people in variables, might want to shoot themselves in the foot.


Nah, these days they'll complain loudly and protest that the government must change the rules to help them because it's obviously "not fair" and they "had no idea".


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## MrBlackhill (Jun 10, 2020)

I've seen suggestions to take a variable rate, but pay it as if it was a fixed rate (at the fixed rate you'd have if you went fixed).

But with rates so low, I'd actually take the difference and invest it. And then if rates start to rise, then you use the money you've saved and invested.


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## Mortgage u/w (Feb 6, 2014)

MrBlackhill said:


> I've seen suggestions to take a variable rate, but pay it as if it was a fixed rate (at the fixed rate you'd have if you went fixed).
> 
> But with rates so low, I'd actually take the difference and invest it. And then if rates start to rise, then you use the money you've saved and invested.


The suggestion is good. Paying a higher amount will reduce your amortization, thus, reduce your interest costs. However, given how low the mortgage rates are, the savings will not be too significant - unless you maintain the same rate and payment throughout the life of the mortgage - which is impossible.

You have options to pay off your mortgage quicker. You have the option of making higher payments, doubling your payment and making a lump sum payment. Not all mortgages offer these benefits but most do. And the percentage or pre-payment varies, usually 15% or 20% is rather common.


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## MrBlackhill (Jun 10, 2020)

Mortgage u/w said:


> However, given how low the mortgage rates are, the savings will not be too significant


Yes, as long as I have room in TFSA and RRSP and that rates are below stock market returns, better put the extra money into TFSA, RRSP until maxed out or until rates start increasing, but I believe that'll take some time before we see rates above 6%.


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