The Difference between Variable and Fixed Mortgages

The past few months have been turbulent in the world economy, with the Bank of Canada and major global central banks dropping the prime lending rates to try to hamper the economic downturn. The Canadian Big Banks have followed the lead of Bank of Canada in decreasing the Prime Rates. This actually resulted in increasing mortgage rates which does go against general market behavior. The concerning question is what really affects Canadian mortgage rates?

A number factors that do influence Canadian economy which includes inflation, export and imports, gas prices, unemployment, the budget surplus or deficits of the Governments, etc. Many people think that the monthly interest rate of Bank of Canada affects all mortgage rates, but this is not actually the case. Fixed Mortgage rates and Variable (ARM or adjustable mortgage rates) in Canada are in fact influenced by a number of different factors.

Canadian Fixed mortgage rates

The price and bond yield of government bonds affects fixed mortgage rates. Bonds are basically considered safer investments than equity or stocks, and in times of the economic turmoils, investors tend to unload equities in favor of bonds, mostly Government bonds, and when the stock market is hot and booming, investors are most likely to make a better return on investment in stocks.

All that means is a low demand for bonds, so decrease in bond value leads to increase their yield. On the other hand, when the economy becomes less stable and stocks are not as enticing, the bonds demand increases and their yields decrease.
The increase in long term Canadian Government bond prices, leads to a decreased yield (return), thus reducing the five year borrowing costs for mortgage lenders which leads to lower 5 year fixed mortgage rates.

During the very uncertain times, due to lack of liquidity in the world markets banks are hesitant to lend to each other, resulting in higher borrowing costs. Lenders are bound to pass on the increased costs on to their customers via higher fixed mortgage rates.

Canadian Variable mortgage rates

The Bank of Canada plays a major part in deciding variable mortgage rates as they set the overnight target rate which they is described as the average interest rate.
The problem with credit crunch scenario is that banks have stopped lending to each other. They're scared due to the instability in the system. That's why, interbank lending rates have increased which resulted in higher interest rates.
Which is the better option: variable or fixed rates?

This common question really depends on each individual's situation and whether they can deal both financially and mentally with the ever changing mortgage rate payments. Because the very last thing you want is to lose sleep when the interest rates increase.

A lot of studies on which is better for borrowers and the analysis shows that historically Canadian homeowners would be better off by choosing variable rates. The interest rates have almost reached their near rock bottom, once the interest rates reach their rock bottom within the next few month, it may be wise to get fixed rates to have a peace of mind for those who don't want to their blood pressure to increase with interest rates.

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Gurmit loves travelling, he has been to over 70 countries. He speaks fluent Cantonese, Polish, Hindi, Punjabi and English. Gurmit is an author, writer, insurance and mortgage expert. He frequently writes on various topics of interest to his readers. To get in touch with Gurmit Singh, please visit his website www.gurmitsingh.ca

Gurmit Singh is a licensed mortgage expert with Dominion Lending Centres Mortgage Villa.

Gurmit Singh, mba
Mortgage Expert
M08009905
Dominion Lending Centres Mortgage Villa (11574)
Email:gurmit@gurmitsingh.ca
Website: http://www.gurmitsingh.ca