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.

How Working from Home Can Save both Employers’ and Employees’ Money

Though the thought the home office brings to mind images of pajama-clad, yawning employee with the slippers up on the desk, the reality is that more and more companies are employing remote workers, or encouraging their staff to work from home. Why is that? Because when it saves dollars, it makes cents (sense), as the old saying goes. 

  • Limit overhead costs

If you don’t have to pay for an office space and all that goes along with that, including desks, computers, chairs, printers, cubicles, and utilities, you are clearly saving on costs. You won’t need as many parking spaces, as many K-cups for the coffee machine, and if you really want to get everyone together in a big space for a conference, big meeting, or a workshop, look into flexible office space which is leased by the hour or by the day. 

  • Greater Productivity from Employees

By cutting water cooler conversations and personal talk behind cubicle walls, you are increasing the amount of time that your employees are spending actually working. But what about meetings? By scheduling telecom meetings with pre-established agendas, you encourage your employees to prepare better so that they can contribute and actually prove their presence and engagement. Today you don’t have to look far to find a customizable VoIP phone system that grows as your business expands, with easy to use cloud-control. 

However, employers are not the only ones loving this new situation- employees definitely score a few perks when they decide to work remotely, rather than come into the office. 

  • Eliminate Commuting Time and Cost

Use the extra time that you now have thanks to not having to commute on something that gives you value. Whether that means more sleep, more time with your family, a morning yoga session, or an opportunity to work some overtime, enjoy that extra time in your day that you would have otherwise spent in the car or on transit. Oh, wait! Almost forgot to mention the money that you save on passes, parking permits, gas, insurance, car maintenance, etc. 

  • Relax

By relaxing, I don’t mean putting your feet up and having a nap. What I do mean, however, is creating an environment in which you are at ease and can optimize your productivity. Whether that means listening to Vivaldi while sitting on an exercise ball or wearing your bathrobe when you are feeling under the weather, go for it. Do whatever it takes to get you to the best YOU. Thankfully, you will also avoid the sometimes annoying mannerisms of your co-workers, like their strong perfume, loud music or habit to talk to loudly with customers on the phone. Phew. 

  • Be at home

Yes, that means you are always there to accept deliveries, to let the plumber in when your sink is acting up, or let the dog out when nature calls. Though it is not fair for you to play housewife/husband while your employer is paying you to work, these tiny minute-long errands don’t take you from your work for long but are extremely valuable.

So no matter which side of the coin you are rooting for, both employers and employees benefit from the increasing trend of working from home. There will always be cases in which this is not an optimal arrangement, due to employee’s lack of discipline or employer’s lack of support, but society is evolving towards this type of working relationship and I guess that we will learn to adapt. What are your thoughts? Would you like to work from home? Would you be able to?