Variable Rate or Fixed? Canadians Unsure

TORONTO, June 2, 2011

After another reprieve from the Bank of Canada for an interest rate rise, there is much talk amongst Canadians about whether or not variable rate or fixed rate mortgages are the way to go.

CIBC recently conducted a poll which indicated that most Canadians are split on whether or variable or a fixed rate is the best strategy, even in light of the knowledge that rates are eventually going to go up. Highlights from the survey include:

• 39% of respondents said they would choose a fixed mortgage if they had to choose between a fixed or variable mortgage today;
  
• 32% said they would go with a fixed rate;
  
• 25% said that they could not choose between the two.

So, there is no clear-cut strategy favoured here.

Also the survey showed that

• 61% of respondents believe interest rates will be up this time next year,
  
• 24% believe that rates will hold their own throughout the next year,
  
• 3% believe that rates will actually go down through the next year.

"The divergent opinions on whether to go fixed or variable underscores what our advisors see everyday in their meetings with clients - choosing the right mortgage depends on your personal financial situation, and there's no single answer for everyone," commented Colette Delaney, Senior Vice President, Mortgages, Lending & Insurance, CIBC Retail Markets.

There are other factors at play than just the directional predictions for interest rates, as Delaney reminds mortgage holders. "You need to approach the fixed versus variable decision from the inside out, starting with your personal financial goals and working from there," added Ms. Delaney. "Your mortgage is a major part of your overall financial plan, and your decisions should be based on how your mortgage fits with your long term financial goals, not on short term rate fluctuations."

Interestingly, the type of rate that you choose seems to have a lot to do with the stage of life that you are in, according to the CIBC poll. 

• 27% of 25-34 year olds (who are also mostly first time home buyers or relatively new homeowners) would choose a variable rate mortgage;
  
• 42% among respondents 45-54 years of age, would choose a variable rate and who incidentally "are more likely to be near the end of their mortgage and have greater tolerance for rate changes within their mortgage payment."

Ms. Delaney noted that homeowners can look at both a fixed and variable strategy over the life of their mortgage. "For most people, your mortgage is a long term proposition, so your strategy should look beyond your first term," commented Ms. Delaney.  "You 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."