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4 Nov

Variable vs Fixed Payment


Posted by: Michael Hallett

It looks like fixed rates on are on the move again. But does that mean you should absolutely 100% opt for a fixed mortgage. Nope, I don’t think so! Weigh the pros and cons! Previous suggestions was that the prime lending rate of 3.0% would go up in late 2014 or early 2015 and now we’re seeing 2016 become a more popular opinion. This is great news for those borrowers that are able to chose the variable rate. I did a quick, easy and loose payment breakdown for to help you see the difference. Which provides more security? Which saves you money? Which pays more principal? Answer…VARIABLE, see below!


5 yr Variable rate mortgage = prime – 0.40% (prime has been 3.0% since September 29, 2010)

5 yr Fixed rate mortgage = 3.45%


FIXED vs VARIABLE — Based on $300,000 mortgage utilizing a  25 yr amortization schedule. The Variable rate mortgage requires you to pay approximately $43,000 in interest over a 5 yr term while the Fixed pay is around $48,000. That’s a $5,000 savings, which could and should be applied directly back to the outstanding principal amount.


2014Variable rate is 2.60% and Fixed is 3.45%

–          Monthly Payment is $1359 or $1490

2015 Variable rate is 2.60% and Fixed is 3.45%

–          Monthly Payment is $1359 or $1490

2016 Variable rate is 2.85% and Fixed is 3.45% (presuming Prime now increases to 3.25% midyear)

–          Monthly Payment is $1397 or $1490

2017 Variable rate is 3.10% and Fixed is 3.45% (presuming Prime now increasing to 3.50%)

–          Monthly Payment is $1435 or $1490

2018 Variable rate is 3.60% and Fixed is 3.45% (presuming Prime now increasing to 4.00%)

–          Monthly Payment is $1514 or $1490


Borrowers that opted for the variable rate over fixed have saved $5,000. By applying it right back to the outstanding balance they have made it easier to renew their next mortgage and protected themselves from rate increase.


Note the Bank of Canada only meets to discuss the Prime lending rate on 8 pre-determined days each year Variable rates can be locked into a fixed term at any time if you foresee your saving being expunged.


In the past 10 years there has been no other 3 year period where the prime lending rate has not changed. Since October 2010 prime has remained at 3.0%. My increase prediction amounts were based on documented increases that happened 3 times in that same year. Prime was adjusted at increments of 0.25% or 25 basis points each time.


Variable rate mortgages also offer a much less and attractive pre-payment penalty is you ever need to alter the terms of your mortgage. Variable rate borrowers will only ever incur a 3 month interest penalty. Fixed mortgages carry a much more complicated pre-payment penalty. The lender will calculate an interest rate differential (IRD) or 3 month interest penalty, whichever is high…generally it’s the IRD that will ruin your day!


Having said all that above, each and every mortgage application is different and needs to be reviewed and qualified using the federal lending guidelines. Circumstances might require applicants to opt for a fixed. For an individual review please contact me to discuss your options.


 (DISCLAIMER – These numbers are merely an example, I am no economist, analyst or master predictor, I just put them together with the resources I have.)