With the recent increase in the Bank of Canada overnight rate and projections for two further increases this year, I am starting to get more questions from clients on whether they should choose a fixed rate mortgage or a variable rate mortgage.

Since the financial crisis of 2008, the variable rate option has served Canadian borrowers quite well as central banks have kept rates at historical lows. As we move into what seems to be a period of inevitably higher rates, now is a good time to review your options and make sure your borrowings are structured to best meet your needs.

The two basic mortgage types available to Canadians are:

1) A fixed rate mortgage. This offers offers a specific interest rate that is fixed or "locked-in" for the term of the mortgage. That means you'll know exactly what to expect, including:

• The interest rate of your mortgage
• The amount of your regular mortgage payments
• The portion of your payment that goes toward principal and interest
• The amortization of your mortgage (how long it will take to pay it off)

2) A variable rate mortgage. With this type of mortgage, the interest rate will fluctuate with any changes in lender’s prime interest rate. If the lender’s prime rate goes down, more of your payment will go towards paying off your principal; if the lender’s prime rate goes up, more of your payment will go towards interest costs. In addition to generally offering the lowest mortgage rate available at a given time, a variable rate mortgage could help you save in interest costs over the life of your mortgage.

My sense is that the Bank of Canada will likely continue to tighten rates with the timing on future increases likely to be data dependent. I believe that ultimately most central banks want to remove the historic monetary policy tools especially those related to “quantitative easing (QE)” and then turn their attention to raising the cost of money. This would mean that the cost of variable rate mortgages will increase and will likely surpass the cost of current fixed rate mortgages at some point.

In addition to the direction of interest rates, there are many other factors to consider when deciding whether a fixed or variable mortgage is right for you. I can help you with a no obligation review of your current borrowings and advice on what options best fit your financial situation. If you or a family member have a mortgage that you would like to discuss please give me a call or send me an email today.

Mike