Current Fixed VS. Variable Analysis

Let’s assume a $500,000 mortgage with a rate of 4.79% 3-year fixed versus a rate of 5.65% 5-year variable. Right off the bat, since we’re assuming a 0.5% decrease in October and a .25% decrease in December, we can decrease our rate by 0.5%. We’re decreasing our variable by 0.5% because my calculator goes in 6-month increments.

We are going to further assume that the end bank of Canada rate will be 2.75% (down from 4.25% today) by midpoint next year. As an aside, some people think the BoC rate would be even lower but let’s just use this assumption for a more conservative approach.

At the outset, a borrower would pay $124 more per month with the variable, but that quickly decreases to paying $170 less per month. All in all, with an adjustable rate mortgage (a mortgage whose payment changes when the interest rates change), one would be $5,002 better off if they took a variable now versus the fixed rate. This consists of $3,500 in less payments and $1,502 in more paid to principal.

OK, but what about a variable rate mortgage? What we looked at was an adjustable rate mortgage. There’s a difference… true variable rate mortgages have static payments, or are fixed-payment variable rates. What this means is that as the rate changes, the payment on the mortgage stays the same. What does change is the proportion paid to interest and principal; this directly affects the amortization rate. As rates decrease with variable rate mortgages, a larger proportion of the payment goes to principal, and a lower portion goes to interest; arbitrarily decreasing the amortization. 

So now let’s look at the same scenario but with an insured rate of 4.19% for the 5-year fixed, vs a variable rate of 5.40%.

Remember, since we’re going to assume that the BoC rate decreases by 1.5% over the next year, with the next 0.5% happening imminently, the end rate will be 3.9%.

OK, so in this scenario, since the payment stays high, we have a $16,173 lower mortgage balance at the end of the 5 year term, but we have also paid an additional $12,722 to principal… we’re actually only $3,450 better off.

Now, is $3,450 that much better over 5 years to have to contend with the variable rate and have to contend with always thinking about your mortgage every time there’s a rate announcement? Maybe. I think yes. However, it’s important to note that the variable rate allows “Convertibility.” A variable rate conversion to a fixed rate may be the best option in both the adjustable rate scenario and the variable rate scenario. Instead of locking in at 4.79% or 4.19% now, one could lock in (convert) their variable rate mortgage to a fixed rate at any time… And, since we’re expecting rates to go down further, the variable mortgage would be a “placeholder” for future fixed rates.

All in all, there’s two reasons to go variable, with the first being: it’s most likely the best fit over the course of 3 and 5 years, and the second being that one can convert to a lower fixed rate within a few months to take advantage of the decreasing rates.

I’m happy to chat about this with anyone! I personally have two variable rate mortgages and am either waiting for fixed rate decreases (we’ll see what we can get) and/or stay with the variable and ride the wave down 🙂