Is it time to go with a fixed-rate mortgage?
By Peter Diekmeyer • Bankrate.com

Figuring out where the Canadian economy is going is a tough job. These days, even experts seem perplexed at how turbulence in financial markets, the ongoing US slowdown and spiking commodity prices will unfold. As such, it should come as no surprise that to ensure stability, many homeowners with variable-rate mortgages are thinking seriously about locking them in.

The big question right now relates to the seriousness of global inflationary pressures. Rising commodity and food prices and slowing growth in global supply chains are boosting consumer price indexes around the globe. The worry is that if sustained, these pressures could force central banks to boost their policy interest rates, a development that would almost surely spur rising mortgage rates here in Canada.

"Times are challenging," says Gary Siegle, regional manager at the Calgary office of Invis, a national mortgage brokerage that arranged close to $7 billion worth of loans last year. "If trained economists can't agree on where interest rates are going, how could the average consumer do so?"

The largest cost of homeownership
The decision whether to take a fixed- or variable-rate mortgage is no mere academic debate. For many families, the interest paid on mortgages represents the largest single cost of home ownership. The borrowing option they choose can swing their expenses by tens of thousands of dollars over the lifetime of their mortgage.

For example, in mid-August of this year, Invis's customers could borrow at a fixed, 10-year interest rate of 6.25 percent. However, the short-term, variable rate was just 4.15 percent. At those levels, interest costs in the first year on a $200,000 mortgage would run to $12,500 compared to just $8,300 in the case of a variable-rate mortgage. That's a $4,200 difference in just one year, which is a lot of money.

Of course, those that opt for variable-rate mortgage rates do pay a price: They cannot be sure that the interest rate they pay today will remain the same. For example, in the early 1980s, in order to fight a previous bout of inflation, the Bank of Canada tightened its policy rate drastically, sending mortgage and other key lending rates skyrocketing to more than 20 percent. While there is little likelihood that will occur today, it provides a constant reminder of how quickly things can change.