Back to Blog
4 Feb

Fixed vs. Variable at February 2014

General

Posted by: Randy Johnson

The Bank of Canada recently stated they may not increase Prime until 2016.  Lets do a “sensitivity” comparison of these 2 choices.  We are looking at a $500,000 mortgage amount, using a 3.29% fixed rate and a 2.55% 4 year, variable rate over a 25 year amortization.

Let’s assume the following for changes to prime over the next 4 years:

1) It remains the same for 4 years,

2) After 2 years, it increases by 1/4% each year,

3) After 2 years, it increases by 1/4% every 6 months,

4) After 2 years, it increases by 1/4% every 4 months.

 

Should those assumptions occur the following would happern:

1) One would save $16,000 by choosing the VRM, which equates to 13.7% of the total monthly payments,

2) One would save $12,500 by choosing the VRM, which equates to 10.7% of the total monthly payments,

3) One would save $10,200 by choosing the VRM, which equates to 8.7% of the total monthly payments,

4) One would save $8,000 by choosing the VRM, which equates to 6.8% of the total monthly payments.

Going back over 60 years, one who has chosen a VRM has saved money 90% of the time.  This would likely be the case in February 2014.