The sky is falling or so I have been told. It’s a scary time.
We are facing inflation… or is it stagflation…? Whatever you want to call it the media is pounding the war drums and chanting a chorus of despair. It certainly feels like their goal is trepidation.
Over the last ten days, five-year bond yields have risen nearly 0.7%. Fixed rates are likely to rise again. I personally have a variable mortgage and I know I have had a few second guesses over the last few months. As a mortgage broker and investing expert, I know that if I am feeling the stress, you certainly are as well!
Whenever I am feeling the weight of my emotions or the pull of public opinion I focus on the math.
A comparison of fixed and variable rates
Currently, fixed rates are round 4.99% and variable rates are roughly 3.45%. For the variable to cost the same as the fixed we would need to see approximately eight to ten 0.25% increases over the next two to five years.
A variable of 3.45% would have an average rate of 5.05% if we saw 8 0.25% increases over the next two years and then rates stabilized.
The same variable rate would see an average rate of 5.06% if we saw ten 0.25% increases over the next five years (three increases per year for years 1 and 2 and two increases per year for years 3,4,5)
Making a decision on fixed vs variable rates
Fixed rates might be the right choice, if we could all go back in time twelve months and lock in it likely would be the right choice. The challenge is we can’t go back in time, we can only make decisions based on the information we have today.
If you strongly believe rates will increase more than 8-10 times over the next two to five years and you will not sell or refinance your property a fixed rate may be a reasonable choice.
If you think there is a possibility you will sell or refinance over the next five years a variable is likely the better choice for you.
Its important to accept the fact that we do not know the future. We can only make the best decision possible based on the facts we know today. Do not second guess yourself, weigh the pro’s and con’s, make a decision and move forward!
Every time I give the mainstream media my time and energy I start to see storm clouds and feel the end is near. It can be worth keeping a finger on the pulse of the news but understand that they are a business and they want you obsessed. There is a tendency for the media to go to extremes!
Stay safe, stay sane and if you need anything we are always here!