North York Real Estate Blog

Fixed or Variable: The Mortgage Dilemma

Michael Pasternack - Friday, July 29, 2011
 If you ask two different people whether you should obtain a fixed or variable mortgage, you’ll likely get three different answers!  Everyone has a different opinion (and sometimes more than one opinion!) on the matter.
 
Being North York real estate agents, we are continually asked our “preference” on mortgages.  Well, here it is:  Generally, we prefer the variable (or “floating rate”) mortgage.  Research has shown that more often than not, you’ll save money with a variable.  Of course, if you’re not the gambling type, a fixed rate may be the way to go. With fixed rates at historic lows, rates likely have nowhere to go but up.  That being said, how long will it take for your variable rate (which, when obtained on a closed mortgage basis as of the date of this blog entry, is typically offered below prime) to be on par with the same fixed rate you can obtain today?  And by the time you hit that “par” rate, how much money will you have saved?  Probably a significant amount.  Take this example:  You require a $500,000 mortgage.  Lender A offers you either (a) a five-year variable closed mortgage at prime less 0.75% (variable closed mortgage), or (b) a five-year fixed rate of 3.75%.  As the prime rate is currently at 3.00%, your variable would be 2.25%. Assuming for the purposes of this example that the Bank of Canada raises rates three times per year at a rate of 0.25% on each occasion (and, of course, it could be more or less than 0.25%), it will take two years before your variable is on par with the fixed option that you could have obtained.  How much money will you have saved during that two year period?  
 
We’re not advocating for fixed or variable, as we are North York real estate agents, not mortgage brokers!  However, we are simply stating our preference.  One of us (Michael) is a practicing lawyer who took his mandatory (and some optional) real estate and land transactions courses in law school, and often recalls one of his professors repeatedly stating “You’ll save money with a variable rate”.  We still live by that statement, both personally and professionally.  We don’t know if you’re the gambling type who doesn’t get butterflies in the stomach every time rates rise, but if you are, we think a variable is the way to go.  
 
And remember, the lenders’ (banks’) posted rates are simply “posted”.  99% of the time, you can obtain better rates by negotiating.
 
We are well connected in the North York real estate market (as well as the Toronto and Thornhill real estate markets), and would be happy to put you in touch with some mortgage brokers who we feel are fantastic to work with and eager for your business (which translates into potentially great rates for you!).
 
If you’re looking for results or general advice, we are always happy to speak with you.  Call Lisa at 416-543-9408 or Michael at 416-786-6160, your North York real estate agents.  
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