Looking at the Variable Again

Category: Education and Learning, First Time Buyer, Home Purchase,

I always find looking at the numbers interesting.

If you have anybody who is thinking about the variable, remember, it’s more flexible than the fixed rate because you can lock in your variable into a fixed rate at any time, and it has lower penalties. But, just because it’s flexible with the option to lock in to lower rates in the future isn’t the only reason why some people should choose a variable rate right now…

Let’s look at the numbers.

Let’s say we have two mortgages: 3-year fixed at 5.59% and a 5-year variable at 6.55%.

In the example below, I’ve calculated the rates decreasing by 0.5% in 6, 12 and 18 months respectively, and then again by 0.25% in 24 months and 30 months. This is a total decrease of 2%

Please remember that 2022 saw a 4% increase in rates and my calculation only shows a 2% decrease over 3 years.

The chart above shows that the fixed rate would provide for $2,242 more in interest over the course of 3 years. However, on the downside on the variable, there’s almost $400 more in monthly payments per year, or a total of $16,500 less in total outstanding principal after 3 years.

Note: these numbers show that the variable is better than the fixed rate over the course of 3 years should the client be able to withstand higher payment. However, it’s not the full story… we’re not taking into account the fact that the client can decrease their payment by locking in to a lower rate.

The next graph shows what would happen if the client was able to lock a new rate at 4% in one year. The payment would go from $3,812 to $2,884, much lower than the 5.59% 3-year fixed-rate payment.

The graph above shows that a client would be $11,752 better off should they have taken the variable and switched to a fixed rate in 1 year.

Happy to go over any numbers with you. 

Just remember, not every solution works for every person. There are pluses and minuses for each option and we want to make sure a solution is tailored properly for a persons unique situation. 

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