Looking beyond variable mortgages

Short-term fixed re-emerging as alternative

Variable rates are back in fashion after the Bank of Canada lowered the overnight lending rate in January, and economists expect another decrease in the near future.

Yet, even though variable rates make sense, most borrowers are still leaning toward fixed-rate mortgages for no reason other than certainty. Consumers like to know what their mortgage rate is going to be.

The good news is there are options for risk-averse borrowers who don't want to dive into the variable-rate waters, but still want the low rates that come with the floating products. For example, CFF Bank, a relatively new Canadian bank being run by the former president of Genworth Financial, is offering a three-year fixed rate for 2.25 per cent.

At a rate identical to the standard five-year variable, CFF's three-year product is the same price, but offers three years of certainty. The downside is in the event the Bank of Canada lowers the overnight lending rate again, potential borrowers would lose miss out.

For example, if the Bank of Canada dropped its rate by one quarter per cent, a three-year fixed client would lose out on the rate drop, but would still be 0.45 per cent better off than if they had chosen a five-year fixed.

Furthermore, if rates remain low for the next three years, which is widely expected, renewing in three years instead of five could create fortunate timing for borrowers if rates then started to increase.

Normally in this type of rate environment, I would recommend a variable option. But it's difficult to ignore the three-year fixed alternative, which comes a short-term guarantee and is essentially the same price as a variable.

One final piece of advice: When it comes to borrowing money with someone else – whether a spouse, family member or friend – always pick a mortgage that makes the least risk-averse party feel comfortable. A household with financial stress is not a happy household for anyone, which is why it is important to look to the weakest link when choosing between fixed and variable.

For more information on variable versus fixed mortgage strategies, give an Accredited Mortgage Professionals (AMP) at Mortgage360 a call – we would be happy to help you make your vacation home dreams a reality.

Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360, and the author of The Mortgaged Millionaire.

* This content was produced by CREB®Now's advertising department, in consultation with Mortgage360. CREB®Now's editorial department was not involved in its creation.