Tuesday, April 27, 2010

Fixed Rate Mortgages are Scams

I went to TD today to get a new mortgage discharge statement because their mortgage rates have gone up. so the penalty for breaking the mortgage on that property has dropped by $3,000 so I am happy about that.

however the TD branch mortgage lady kept telling me how great fixed rate mortgages are and that the rates are rising and how it is much safer to get a fixed rate.

I think that the mortgage lady at TD is just doing her best to giving advice that she thinks is correct. The same advice she hears around the bank and gives to everyone getting a variable mortgage. however in my mind this sounded a lot like FUD.

let us look at the numbers

the best 5 year fixed rate mortgage around is 4.3 %
the best variable rate mortgage around is prime - 0.5 % = 1.75%

to simplify the calculation,  we are going to pretend the best variable rate is 2% and the best fixed rate is 4% giving an artificial advantage to fixed rates, and we will also ignore the fact that the mortgage balance is smaller at year 5 than it is at year 1 making the fixed rate deal even sweeter.

In order to win with the fixed rate deal you need the variable rates to look like this:

year 1: 2%
year 2: 3%
year 3: 4%
year 4: 5%
year 5: 6%

just to break even.

prime at 6.5% 5 years from now will make half the country unemployed and homeless.

so even after the sweetener assumptions and favourable adjustments to the fixed rate mortgages it is still a clear loser.

on top of that you will have to hold this mortgage to maturity or suffer paying the IRD penalty as I am. while the penalty on a variable rate would be 3 months interest.

and not to mention the significantly worse cash flow profile a fixed rate mortgage will create.

I don't understand why anyone would get a fixed rate mortgage.  I don't understand why there is even a debate about which is better !

never go for a fixed rate mortgage.


  1. Well, the year now, 2012, we have gotten into the very strange situation where a fixed mortgage is LOWER than the variable one ??? 2.59% 2-year fixed vs 2.9% variable. Never thought I would see the day.

  2. yes Ironically I've refinanced all my mortgages into 5 year fixed rates. it doesn't make sense to go with variable rates these days.