Fixed or floating? The great mortgage debate of our time

Fixed or floating?

For those taking on a mortgage or renewing one, it’s a question that can be complicated.

On one hand, interest rates are at historic lows. The Bank of Canada’s benchmark overnight lending rate is at 0.5 per cent. To some borrowers, this might suggest it’s a good time to lock in at a low rate for a long time.

On the other hand, to the surprise of almost no one, the bank suggested that it anticipates no changes. “The near-term outlook remains broadly the same as it did in January,” it said in its most recent rate-setting statement, on March 9. That suggests a floating rate might make sense. The issue becomes more complicated, though, because borrowers likely won’t find much advantage.Compared with times when interest rates were high, there’s not a lot of cost difference between fixed and floating rates.

“I understand that today, the floating rate is not as attractive, but other times it is,” says Trish Bongard Godfrey, a Toronto real estate agent.

While mortgage rates are always higher than the central bank’s key rate, they follow the same trends. Posted one-year fixed mortgage rates from major Canadian lenders range from 1.99 per cent to 3.29 per cent.

The difference between five-year fixed rates and floating rates is often less than 20 basis points in either direction.

“If you look at interest rates today, let’s say it’s pretty simple to get a rate of 2.59 for a five-year, fixed-rate mortgage. For a variable rate mortgage, the going rate is 2.40 per cent. So for 19 basis points, do I want to take the risk?” says James Robinson, mortgage broker and owner of Dominion Lending Centres Mortgage Watch in Toronto.

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“A variable-rate mortgage means the borrower takes the risk, and a fixed-rate mortgage means the lender takes the risk. You could characterize those 19 basis points’ difference as an insurance premium that the customer pays to guarantee the interest rate.”

Given that most mortgage rates can be negotiated with lenders to save a few basis points, the spread between fixed and floating mortgages might be even smaller than the posted rates suggest.

That makes it even harder to make a decision, real estate agents say.

“I guess it depends on how long you’re planning to live in your house,” says Thomas Elltoft of Niagara-on-the-Lake Realty in Niagara-on-the-Lake, Ont. If you think you’ll stay for more than five years, “it might be better to get a fixed mortgage, if you can get a good one.”

This method isn’t foolproof, though. “People said go for fixed last year, and then rates went down,” Mr. Elltoft says.

Last year many people chose fixed mortgages in the expectation that rates, which were already low, were likely to rise in 2016. Indeed, the U.S. Federal Reserve raised its key lending rate last December and suggested that more increases would come, only to back off from its prediction early this year.

“Then again, in the early 1980s and ’90s you would have been happy with a fixed mortgage. I think at one point rates went from something like 12 to 18 per cent,” Mr. Elltoft says.

Mr. Robinson says he tries to deepen the conversation with borrowers.

“People will come in and say they’ve heard that up to 80 per cent of the time, people save money with a variable rate mortgage, and because of that they want to take one. What I want to know is, right now, are we in that 80 per cent [when it makes sense] or are we in the 20 per cent [when it doesn’t]?”

A big consideration in the fix-or-float debate is what kind of extra cash you have on hand and whether you expect that to change for better or worse, Ms. Bongard Godfrey says.

“It depends whether you think you’ll have an opportunity to make a lump-sum payment in the future, and whether you’re willing to risk the rates going up. There’s a certain gut check you need to do in terms of your own life and whether you want security of knowing what rates will be,” she says.

“Personally, I think a well-negotiated floating rate is advantageous for people right now, and it may continue to be if interest rates aren’t moving up. But you need to compare the actual numbers.”

With the difference between fixed and floating rates so narrow, the question becomes almost philosophical, according to Mr. Robinson.

“You want to ask yourself: Is it worth it to me to know what my interest rate is going to be for the next five years?”

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