Fixed vs. variable: How not to lose this mortgage guessing game. - Mortgage Rates & Mortgage Broker News in Canada

Abstract

Economists are calling for a CPI reading of anywhere from 7.1% to 7.5%. That would make it be the most menacing inflation print since 1983, when prime rate was 11.5%. As some second-guess the "Variable-rate advantage," we'll hear more people asking things like, "Is it too late to lock in?" But with that 184-basis point fixed-variable spread intact, most will probably conclude that floating rates still have too much of a lead to pass up. "The market is smart, and is usually good at setting 5-year [fixed] rates a level that reflects expectations for future variable-rate movements," BMO economist Robert Kavcic said in an emailed interview. As most readers here know, 5-year fixed rates move with 5-year bond yields. If rates are priced efficiently, and if we have a rough sense for where rates will likely end up, what point is there in trying to forecast which term will be least expensive? Projecting which mortgage will win over five years "Can be hard when the market is priced to reflect expected changes," Kavcic says. The only time in history when variable rates under-performed 5-year fixed rates after prime was over 30% above its five-year average was during a short stretch in 1979. The 1979 case saw rates run up 1000 basis points in people's faces after the "Experts" told them to renew into 1-year fixed terms. Of course, once core inflation starts making relative lows and once the OIS market starts pricing in rate cuts 12-18 months out, a borrower's variable exposure can be more safely increased, potentially up to 100% depending on their circumstances.