When Rates Rise, Which Mortgage Is Best?

Posted on June 17/2011 by

With interest rates expected to rise, nearly four-in-ten Canadians believe that a fixed mortgage rate is the way to go over the next year, a new poll shows.

Still, another 32 per cent, or nearly one-third, would choose a variable rate, which moves up and down with the prime rate, according to the survey released Thursday by the Canadian Imperial Bank of Commerce,

“The results confirm there really isn’t one right answer when it comes to choosing a mortgage and the rate alone is not the only factor that Canadians consider,” Colette Delaney, senior vice president of mortgages, lending and insurance at CIBC Retail Markets, said in an interview.

Variable mortgage rates tend to be lower than fixed rates. That’s because with fixed rates, you’re paying extra for the peace of mind of knowing that if rates move up, you will not be affected.

Financial planning experts typically suggest that homeowners who have a variable rate may want to lock-in when interest rates are on the rise.

But, Delaney stressed, that may not be the right decision for everyone.

“There is a mathematical side to the decision, but there’s also the important issue of how your mortgage payment fits into your financial plan and that’s unique to everyone,” she said.

The Bank of Canada opted to leave interest rates unchanged earlier this week.

But economists believe the central bank will begin increasing rates in September to keep a lid on inflation, as well as household borrowing.

Nearly two-thirds of those surveyed believe interest rates will be higher a year from now, while 24 per cent expect rates to remain the same, CIBC said.

The poll results also highlight that views on choosing a fixed or variable mortgage can change depending on your stage of life.

Among 25-34 year olds, who are more likely to be first time buyers or new homeowners, only 27 per cent would choose a variable mortgage.

That climbs to 42 per cent among respondents 45-54 years of age, who are more likely to be near the end of their mortgage and are better able to deal with rate changes.

Homeowners may choose to start with a fixed mortgage when you buy your first home, then transition to a variable mortgage in later terms when you have improved your financial situation and paid down some of the principal,” Delaney said. “It comes back to people wanting to choose a mortgage that’s right for them. After all it’s the biggest financial decision you’re ever going to make.”


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