Fixed mortgage rate vs. variable rate

Which one should we pick? Almost every home buyer faces this head scratching question except those who pay cash in full. 😊

Just heard a podcast today by NPR Planet Money – One economist’s take on popular advice for saving, borrowing, and spending. In the end of the podcast, the Yale economist James Choi said variable mortgage rates are cheaper. However, this only works for people who has enough buffer to weather the high interest rate fluctuations like what is happening now. For those homeowners are living paycheque to paycheque, that is way too dangerous. Those are so called house rich cash poor. It is advised to never put ones in that situation in the first place. Don’t extend oneself too thin especially when it comes to our finances.

When the interest rate is low like period between the 2008 financial crisis and 2020 pandemic, it is a great saving decision to choose variable mortgage rate. However, many would say that is merely luck. However, when the interest is high like now, the economist Mr. Choi said the cost of variable rate and fixed rate are similar. The main reason to choose fixed mortgage rate is the certainty of cost. However, there is a price for that peace of mind. The banks make sure of that. If they offer the same interest rate for a long time, they have a team of PhD doing all calculations and forecasts to come up with a rate to cover the future interest rate hikes. Risk and reward. They bear the risks, so they will charge high prices – higher mortgage rates. No free lunch.

Mr. Choi himself is a renter for life because he doesn’t want to be bothered with the trouble buying and maintaining a home. He also doesn’t get satisfaction from owning a home. That is very logical way or economist way for decision making. For sure, owning a home of not is a very personal and emotional lifestyle decision besides a financial one.

Published by Worthfy

Financial literacy and counselling

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