Rate yourself: Fixed or variable mortgage?

With the Bank of Canada now widely thought to have concluded a series of seven interest-rate hikes in the past year, it's time to assess the two strategies.

Many variable-rate mortgage holders may regret not having locked in at a safe fixed rate, but mortgage brokerage Invis says most of them fared about the same as their locked-in counterparts during the central bank's tightening cycle.

"Without a doubt, the variable-rate mortgage stood up well to the rapid succession of rate increases experienced over the past year," says Invis president Andrew Moor.

A year ago, Invis says, a variable-rate mortgage could be had for 0.8 percentage point below the commercial banks' prime lending rate, or 3.45 per cent. On a $200,000 mortgage with a 25-year amortization, that cost $993 per month.

Today the rate on that mortgage would be 5.2 per cent, and monthly payments have risen to $1,186.

A five-year fixed mortgage was available at 4.5 per cent in September 2005, and the monthly payment on $200,000 was and remains $1,107.

Over the year, Invis says, variable and fixed-rate mortgage holders paid about the same in interest and reduced their debt by about the same amount.

At present, a new $200,000 five-year fixed-rate mortgage with a 25-year amortization would have a monthly payment of $1,220.

Meanwhile, for variable-rate enthusiasts, CIBC World Markets economist Jeffrey Rubin is forecasting as many as three quarter-point rate cuts by the Bank of Canada over the next nine months.

And Invis says lenders, amid intense competition, now offer variable-rate mortgages at as much as nine-tenths of a point below prime.

"For today's homebuyer, the carrying costs on a variable-rate mortgage are still less than on a new fixed-rate mortgage," says Moor.

At the same time, he observes, "we find many of our clients prefer the stability of a fixed rate over the potential cost savings offered by a variable rate."