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Which is Better: Variable or Fixed Interest Rate?

December 21, 2012

Prime rate jumps are difficult to predict, and may jump over 50 basis points in a 6 month stretch. Fixed rates do not change mid-term.

How to Predict Future Interest Rates

If you want to do the research and follow the bond rates and when bonds are sold, you may find that 1-6 months later, prime rate will increase, however, this is not set in stone as a firm predictor. It may end up being a glitch.
When bond prices fall, bond rates increase, which increases fixed rates. A good rule to follow would be that when the difference between variable and fixed rates is negligible, go with a low fixed rate instead of a variable rate mortgage with plans to lock into a fixed rate later.

When Should I Get a Variable Interest Rate?

When the spread is larger, you could follow the bond rates and lock in to a fixed rate as soon as bond rates go higher. This seems like the most prudent choice for the variable rate borrower, because if you wait too long, a 2nd increase may leave you stuck with a higher rate than you wanted.

Also keep in mind that some lenders do not offer the best possible rate when locking clients in.
This should be the first question a variable rate borrower asks their prospective lender before taking that variable mortgage.
Borrowers can play it safe or gamble with the rates. Figure out which type of borrower you are and play your game.

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