Saskatoon Mortgage Broker shares article – Fixed or floating? The great mortgage debate of our time

Written by David Israelson, March 18, 2016


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.

“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.

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