Fixed vs. Variable: Which Mortgage Should You Get in 2016?

With home prices in Toronto and Vancouver seemingly going up thousands of dollars per month, many Canadian buyers are desperately seeking to buy houses, worried the market will zoom by and they’ll be stuck renting forever.

Meanwhile, millions of current home owners are faced with a dilemma. With mortgage rates at record lows, they’re tempted to lock in today’s enticing rates for the next five years. But variable rates are still cheaper than fixed, and interest rates don’t look like they’ll increase anytime soon, at least here in Canada.

So there are compelling arguments for homeowners to choose both fixed-rate or variable-rate mortgages. Here’s how these folks can figure out which is best for them.

Other factors to consider

The first thing mortgage holders should consider is their overall financial situation.

Choosing a variable rate will save money over the short-term, there’s no doubt about that. But those savings come with a healthy amount of uncertainty. What if rates shoot up and the payment goes higher?

Lenders have helped protect against that, introducing variable mortgages that keep the payment the same no matter what interest rates do over a five-year term. The kicker is this product is generally only available to people who can afford a hike in interest rates.

Increasingly, people are opting for variable rates because they barely qualify for a mortgage. They’ll gladly exchange the risk of higher rates in the future for lower payments today because a smaller payment is a very big deal to them right now.

These people probably shouldn’t be in variable rate loans to begin with. If you’re one of them, I’d suggest a fixed-rate mortgage. Yes, it’ll cost more day one, but at least there’s no risk of the payment going up. Or, better yet, these folks should be in a variable rate mortgage with payment protection.

What about folks who can afford whatever?

For most people, the fixed vs. variable debate comes down to one factor.

What is the insurance of having a steady rate worth to them?

These days, the spread between five-year fixed and variable rates is approximately 0.5% annually. Some mortgage brokers are offering lower fixed rates, but the 0.5% seems to be about the average.

Over the five year term of a mortgage worth $300,000, choosing the fixed option is worth about $7,500 more in interest compared to the variable option–assuming rates stay constant throughout. We’ve seen variable rates fall in Canada over the last two years. If the trend continues, the difference between the two types of loans gets even bigger over the span of the next five years.

In exchange for taking on this risk, folks get protection in case rates to start to creep higher. Although that might seem unlikely at this point, a lot can happen over the next handful of years. People who got a mortgage in 2004 renewed in 2009. The world had completely changed in those five years.

Ultimately, insurance costs money. If doesn’t matter if that insurance is for a house, vehicle, or on your life. Getting a fixed-rate mortgage is a form of insurance, and that always has a cost associated with it.

Remember, not all mortgages are five years

Not everybody should be in a five-year mortgage.

The big group that shouldn’t are those who are thinking of moving relatively soon. Payout penalties are highest for longer loans. If moving is something that’s crossed your mind, stick with terms of three years or less.

Shorter terms can also serve as a nice hybrid between fixed and variable rates. The cost of a three-year mortgage usually ends up about midway between the cost of a five-year variable and a five-year fixed rate. This can be a nice compromise between the two.

Ultimately, going with a pure variable mortgage will likely save you money, like it has for the last decade. But with rates at all-time lows, it’s easy to say locking in isn’t the worst idea in the world. Personally I’d go with variable over fixed, but still can’t really fault anyone who chooses to pay a little more for the insurance of a fixed rate.

Is Your CAA Membership Worth It?

Every year for Christmas my Grandmother used to get me a Canadian Auto Association membership. You Americans reading this have something similar, called AAA. I’ll let you figure out what that stands for.

Here’s how it works. For a minimum cost of about $83 per year in Alberta (certain plans are more), you get all sorts of perks. The big one is free roadside assistance, which covers locking your keys in your car, tire changes, battery boosts, towing to the nearest garage, and running out of gas.

They offer other stuff as well. If you want information about a certain place, CAA will send you maps and guidebooks. Members qualify for special hotel deals and other travel perks. Cheap car insurance is offered. The club even has an app that’ll tell you where the cheapest nearby place is to fill your tank.

After a few years of getting this membership, I realized something. I wasn’t using the darn thing. Using CAA to get travel deals is a thing of the past, since it’s easy to use the internet to find cheap hotels and flights. I get maps on my phone; the last thing I want to do is crack out a big cumbersome piece of paper you need a degree in Physics to fold back up.

I was using the auto insurance, at least. After having my membership for a year, my car insurance stayed stubbornly high even after I completed another incident-free trip around the sun. I called up my local CAA branch, and 15 minutes later I was saving close to $500 per year.

That went well for a few years, until I decided to shop around again. The CAA-branded insurance wasn’t even close to the cheapest. So I dumped it faster than my first non-imaginary high school girlfriend got rid of me.

I was left with a service I wasn’t even using. Paying $83 per year for that was silly, even if it wasn’t my own money.

Should you do the same?

About 10 years ago, when booking hotel rooms online really started to surge in popularity, my Grandmother was booking a room for a family reunion in a medium-sized city. She got some information from CAA, and made a couple of phone calls. A few minutes later, she had a room for $149 per night after getting her CAA discount.

I didn’t have anything pressing to do, so I went on her computer to see what kind of deal I could find. Less than five minutes later I had pulled up the hotel’s page on Expedia which was offering rooms at… $129 per night.

Grandma wasn’t stupid, so she called up the hotel and explained how I found the same room on Expedia for $20 per night less. The hotel reacted exactly how you’d expect–they matched the price found online, once they verified it existed.

I can remember when booking hotels was stressful. You often had nothing to go on besides a black and white accommodation guide and the reviews of friends. CAA was a valuable tool back then.

These days, there are a dozen big hotel booking sites all with hundreds of reviews about every hotel in a city. The information advantage that was formerly enjoyed by hotels is long gone. That’s a good thing for consumers, and a bad thing for hotels. It’s also a bad thing for CAA.

Having the CAA seal of approval used to be a big deal for hotels. These days, nobody cares.

It’s the same thing with roadside assistance. Most people who can afford an extra $83 per year in insurance can also afford newer cars, vehicles that don’t tend to break down on the highway. And even if your car does break down, finding a tow truck on your smartphone isn’t very difficult. Phone GPS makes it easy to tell the tow truck driver where you are, too.

So to review, CAA coverage gives you, essentially, three things. It gives you peace of mind when driving, travel assistance, and cheap insurance. But technology has also given us peace of mind while driving, travel assistance, and ways to easily shop around for cheaper insurance. Why pay $83 per year for something you can easily replicate for free using the technology you already own?