In July of 2019, the Bank of Canada released a statement that stated the following, “At the national level, the housing market is stabilizing, although there are still significant adjustments underway in some regions.” With real estate prices fluctuating in recent years, the expanded mortgage stress test that made it more difficult for buyers to get much-needed financing, this announcement is like music to the ears of investors.

Moreover, economic consequences that have been brought up as a result of trade tensions down from trade tensions, especially between China and the US, the Bank of Canada has managed, for the most part, to hold its target key interest rate of 1.75%.

As far as the best rates go, however, many borrowers are still confused as to which kind offers the best value: fixed rates or variable rates? Historically, variable rates have cost borrowers less overall, but this is not to say that these types of loans are always the best option. Contrary to popular belief, fixed rates have their place in a borrower’s portfolio and make the most sense in a particular market and economic situation.

Variable rates or also known as floating interest rates are attractive because they are almost always lower than fixed rates. A study that was conducted in 2001, found that between the years 1950 and 2000, variable rates were the most cost-effective choice 90% of the time!

As the names suggest, variable rates are subject to fluctuation throughout the loan and are influenced by several factors. These consist of factors like the BOC’s benchmark rate, the market rates, and even the lender’s risk tolerance. Whereas fixed rates remain the same throughout the mortgage regardless of what happens to the market, it is important to keep in mind that lenders charge a premium for this peace of mind. Hence, making fixed rates higher than variable rates. Do keep in mind that the answer to the question, “Whether or not one type of interest rate is better than the other?”, depends on a variety of circumstances and components.

A great example is post-recession, interest rates are expected to drop as the central bank and government attempt to revitalize the market. Having access to cheap money encourages borrowing and results in spending. This promotes activity in the market whilst injecting much-needed money into the economy. As a result of these low-interest rates, those who take a variable-rate loan before the post-recession see their monthly amortizations dive.

Apart from the economic environment, the circumstances of the borrower and objectives also impact the choice between fixed or variable interest rates. In a CBC article, a well-known financial advisor mentions what he prefers. He states that he has chosen a variable-rate mortgage for his rental property not only for the cost savings but also for the less severe penalties for early payment completion. “Because I never know when I’m going to sell my revenue property,” he writes, “I’d rather be in a mortgage that won’t punish me too badly if I decide to sell before the end of my contract.” His permanent residence is another story simply because he has no intention of selling the property, prepayment penalties are irrelevant to him and a fixed-rate mortgage that offers more security in the long run is a more viable choice.

Apart from the individual circumstances of a borrower, lenders may also have occasional offers that can make a difference. When costs for lenders are down, the savings are often passed onto the consumers as they compete with others to gain market share by offering seasonal promotions. For example, April, May, and June are important months for borrowing because most families are on the hunt for new housing during this time. As they want to get settled before going on vacation for the summer or starting the school year. These great deals can come in both forms, either fixed or variable-rate mortgages, and each lender may have its lucrative way of financing and presenting its products to borrowers.

It is important to keep in mind that historical trends suggest that a borrower is less likely to pay more on variable-interest loans. But given the current market, patterns do not necessarily predict future rate movements. For example, in 2019 many economists predicted the continuous interest rate hikes from the Bank of Canada 2019. But they kept the benchmark rate the same, rather they dropped later on in the year. In aims to stabilize the housing market, recent trends have been pointing more towards fixed-interest mortgages as the better option.

In the case that a borrower chooses a variable-interest loan, however, they must be able to bear the possible rate increases, in addition to the longer the mortgage duration. Hence, making the risk much more significant. On the other hand, as far as fixed-interest loans go, no one can put a price on peace of mind.