First-time home buyers can find the entire process mind-boggling at best, but even seasoned veterans can get tripped up when deciding between variable- and fixedrate interest rates. Mortgage broker Shelley Black says it can be a comfort issue rather than a practical decision.

“I once panicked when the rates started to go up, and locked in at 6.75 per cent for five years. The rates promptly dropped again to 4.35,” laughs the Mortgage Alliance consultant. She paid a premium to reinstate the variable rate, but ended up making more than her money back regardless. “I should have known better than to react emotionally, but it can be hard to be objective when it’s your own money.”

Consequently, she says individual personality and circumstances are often better indicators than rates when buyers are making this decision.

Fixed rates, although not necessarily the most costeffective choice available, offer stability. Mortgages can be locked in for periods ranging from six months to 10 years. For those who don’t want to think about their mortgages except when it’s time to make a regular payment, longerterm options allow peace of mind until the term nears its end and opens up for re-negotiation.

But think this through, Black warns. Built-in penalties can be costly if escaping the contract prematurely.

This consequence can also severely limit options if a home-owner wants to access equity in the middle of a term. Many lenders will renegotiate early without adding fees, but only if the mortgage remains with them. So, if another lender is offering a better deal, it might remain beyond reach. But check with a broker, suggests Black, because sometimes the probable return warrants the expenditure.

For first-time buyers or those who deposited a minimal downpayment, personal debt ratios may not tolerate increased rates, so the long-term alternative may be the most appropriate choice.

Variable rates, on the other hand, change with the market and demand a certain risk tolerance. The amount of interest due with each mortgage payment can increase or decrease regularly. For those with an abundance of home equity and little amortization time remaining, the possibility of change may be more palatable.

Because variable rates allow the mortgage holder to lock in at any time, the perception exists that the market requires careful watching so money isn’t lost as rates creep up, says Black. This can cause anxiety among the faint of heart who are constantly trying to determine the right moment to lock in.

For those who make the decision with this opt-out in mind, Black suggests their lenders be asked for an assurance (in writing) that the discounted rate will remain available in the future if the shift is made.

Over time, however, things generally even out, she adds, so it isn’t actually necessary for a variable-rate mortgage to be highmaintenance.

“The potential is there for interest savings, but if you’re going to fret about it, lock in,” she advises. “And, if you’re going to choose variable, ignore the fluctuations unless something significant hits the news – then check with your broker.”

Despite fluctuations, Bank of Canada statistics have determined history favours the variable option. Rates over the past 10 years for a five-year fixed rate have averaged 6.09 per cent, while the average variable rate was 5.06 per cent.

Black cautions against using this as a deciding factor though. History doesn’t necessarily repeat itself.

“Rate predictions are a real crystal ball thing – it depends on world economics,” she adds. “Early in 2007, Canadian economists predicted prime rates would go down, and they ended going up. And while they thought they’d go up again in September in reaction to world markets and the Canadian economy, they stayed level.”

World events like the 9/11 twin-tower attacks are unpredictable, but can have a direct impact on rates, so without that crystal ball in hand, it’s best to look at a number of indicators before making the decision.