Quote:
Originally Posted by hulkrogan
Yup, on a big up-kick you can definitely beat variable on a fixed. The problem is, how do you know when that up-kick is coming? I was told by everyone and everything I read that rates where going up when I signed on 3 years ago for a 5 year 3.65. That was the historical low for 5 year fixed rates ever, and everyone, including the BOC was warning that rates were going up in a matter of months. I couldn't lose! Oops.
Now maybe the fact I'm locked in a 5 year means I'll miss that big up-kick, and my next 5 year (in 2 years) will suck. See how easy it is to lose?
I can totally understand taking a gamble on a 2.99 right now. It looks like not a bad idea at all. But 3.9 does not look good at all.
Fixed rates are determined by the bond market, not "the bank". The fact you can get a 10 year 3.89 right now suggests the market is banking on interest rates being below that level for the next 10 years.
As soon as interest rates show a sniff of skyrocketing, bond yields will go through the roof, and the spread between variable and fixed will make you cry, and it's too late to do anything about it.
An increasing interest rate environment doesn't mean that fixed is better. An unexpected increasing interest rate environment does.
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I think the problem with your analysis that I'm having is that you are relying too much on what's happened in the past. You are using the fact that interest rates stayed low for longer than expected this time to suggest that trend will happen in the future.
Don't get me wrong, I agree with you, in many situations, a variable is better. I have a variable myself. I got it about 14 months ago. At that point fixed was at 3.6, variable was prime -.9% (effective rate of 2.1%), and the general consensus was rates would stay low for another year.
Now with variable at prime -.6%, fixed at around 3%, and much more uncertainty in as to interest rates in the future, I'd go fixed right now. Compared to a year ago, there's more uncertainty with rates, and the spread between fixed and variable is much smaller.