This is probably one of the most common questions asked by potential and existing homeowners. With so many factors to consider – from personal finances to the economy – the answer can change from year to year, and mortgage to mortgage.
Right now, if you’re looking at a 5-year mortgage, chances are if you go variable, you’re likely going to see some rate increases in the coming years. That being said, the global economy can shift at any given second, and something unexpected could occur that would force the government to stand pat when it comes to interest rates. The thing is, you never know!
What you do know is how much your household can safely afford – and how much risk you’re likely to tolerate. The new mortgage rules state that, to qualify for a variable rate mortgage, you have to be able to afford the current 5-year fixed rate. So right away that should give you a little bit of breathing room. The lowest 5-year fixed rate available right now is 3.65%. With that rate, the monthly payment on a $100,000 mortgage would be $507.22.
With the Bank of Canada’s overnight rate sitting at a record-low 1% right now, variable 5-year interest rates are sitting at 2.25%. The monthly interest rate on a $100,000 mortgage at that rate would be $435.61. Many economists predict that between now and the end of 2012, variable rates will increase to about 4.75%, which equals a monthly payment of $567.46.
The thing is, nobody knows for sure if or when a rate hike will happen – so either way, you’re taking a gamble. You could be missing out on months of a 2.25% interest rate or, if rates start to hike right away, you could come out ahead with a 3.65% fixed. In the end, you have to make the decision that makes the most sense to you – and that you feel most comfortable with.