Our first mortgage was a 5-year, fixed-rate mortgage at a little bit over 5%. Over the five years of the mortgage, the variable rate never exceeded the fixed rate we were paying. Often times, the variable rate was 1% to 2% cheaper over an entire year.

Interest rates since then therefore would have different influencing factors than before – and much of the data that skews the long term rate histories higher occurred before 1992.

Just food for thought…

And interesting on the 5 year rolling periods, I would have expected it to be different considering the 80′s with the 15%+ periods, and the early 00′s with the single digit rates. Then again, averages probably work out the same, we’d probably have to get technical and look at the deviations to try and come up with a perfect answer (don’t worry, I’m not suggesting we do it!).

You make a great point about when banks heavily advertise variable rates… I had never thought about it until you mentioned it, but once I did I realized you were dead on. I also agree completely about making sure you can make extra payments whenever you want, not getting stuck on an amortization period.

I personally think the difference between short and long term mortgage is almost negligible in the long run so I’m not too worried about it.

I think most first time home buyers who are stretching to buy a house should be locking in for at least a few years in order to buy some time to pay the mortgage down before the mortgage comes due.

Also, the spread of Variable to fixed is only around 0.65% right now. So in your example above of variable was 5% then the 5 year fixed would be around 5.65%. If rates were to go up 2% over a 2 year period then the fixed guy makes out like a bandit. Variables only work out if people lock in and rates go down for an extended period of time afterward.

All I’m saying is that at some point when rates are really low (like 2003/2004) there is a much greater chance of the rates going up rather than down more. At that point banks seemingly advertise variable rates as the way to save the most cash. I argue that they are out for profits and locking in under 7% is probably the best strategy.

Currently the 25 year fixed rate is around 6.95, so for right now I think it’s a really tough call. If that gets below 6% then I would think the best thing to do is just lock it in and relax in your home for 25 years knowing you’re smooth sailing the whole way. Will it work out all the time? Absolutely not. I think the peace of mind is worth that risk far more than the amount of cash the variable rate has of potentially saving.

Make sure you can pre-pay and increase payments to reduce your amortization period during this time, don’t lock in to 25 years with no options

http://www.ingdirect.ca/en/mortgages/index.html

Also, canequity.com lists their available 25 year fixed rate. Maybe your bank told you this to talk you in to something you didn’t want because rates are low, I would say next mortgage you are doing, get a broker.

Of course, that doesn’t take into consideration that a variable rate can be turned into a fixed rate at any time… let’s say 9% was the average, variable right now was 5%, and the bank would offer you a fixed rate equal to 2% higher than the variable rate. At that point, you could stay variable until interest rates rose to 7%, at which point you could flip to fixed at 9% and still be ahead overall.

I’d also really like to see some stats on default rates for variable, and each fixed term length mortgage. For example what’s the default rate on Variables vs fixed 1 year, fixed 5 year, fixed 10 year and fixed 25 year mortgages. It would make for some interesting reading. I wonder if that data changes when you have periods like 2003 and ’04 where rates were historically low and then increased in to 2006, 07, and now ’08.

Anyone know where I could find stats like that?