Three years ago I bought a condo.

Interest rates were at record lows.

The variable rate was a 2.25 and the fixed-rate was at 3.25

Which one would you have chosen?

The fixed-rate guarantees the same rate for 5 years and I can feel safe that the interest rate will not be higher than 3.25%.

The variable rate is, well,  variable. It could go up or it could go down. But being that we have never had interest rates so low before, chances are that variable rates will go up.

My friend who also bought a condo, he chose right away the 3.25%. He saw it as a no-brainer. Why would someone take the risk of choosing an interest rate that could go up?

When I asked him: “Why did you choose the fixed rate?”

He answered: “I chose a fixed mortgage for stability, that way I know exactly what I am paying for the next 5 years.”

He added: “Interest rates can’t go any lower than that”

He was right, interest rates didn’t go any lower. In fact, they went up.

So which one did I chose?

I chose the variable. I am more of a gambling guy. I took a risk. I got the lower interest rate, even with the knowledge that it was unlikely for interest rates to go any lower and that most likely they would go up.

How did we fare, my friend and I? Who made the better choice.

Well, we both made a better choice according to our risk tolerance.

My friend chose the best interest rate according to his risk tolerance. For him, it was irresponsible not to lock in these low rates.

Me, on the other hand, I was happy as well. I created a narrative in my head which made it irresistible not to take advantage of these low rates.

Interest rates did go up by 0.25%. So after two years of paying low-interest rates, my mortgage interest rate went from 2.25% to 2.5%. My gamble has paid off. I am still paying less in interest rates than if I would have chosen the fixed rate of 3.25%.

Why did I take the variable interest rate?

It was a gut instinct. If you would have asked me the same question, at that moment, I wouldn’t have been able to give an appropriate answer. But after some reflection, here is my answer.

The Bank of Canada determines the key interest rates and from there, the different commercial banks determine their prime rates. So, if The Bank of Canada raises its interest rates, my variable interest rates would have gone up.

Canada is considered to be a stable country, one who moves very slowly when dealing with interest rates. Investors feel encouraged to invest in economies with stable interest rate policies and it is to Canada’s benefit not to change interest rates too much or too often.

The difference between the prime rate and the variable rate was 1%. The bank of Canada usually moves interest rates at 0.25% at a time.

In order for me to lose in my gamble, the Bank of Canada would have to raise interest rates by 0.25% more than four times in a short period of time.

Different studies have found that there is a higher probability of paying less money in interest payment with a variable rate versus fixed-rate loans.

Another reason to choose variable rates is that it is less expensive to break up a mortgage

Breaking up a mortgage loan

When a person asks for a mortgage loan, that person commits to terms and conditions for the next 5 years. After 5 years, those terms and conditions are re-negotiated.

But many things could happen in those 5 years and borrowers might want to break their mortgages. They could get married (or divorced), have a baby, or have their kids moving out, get a job in a different place, or they may have many other reasons to break the mortgage.

When a borrower breaks a mortgage, there are usually some penalties to consider. When the bank lends money, the bank is counting on the interest the borrower pays as part of its revenues. If a borrower breaks the mortgage, the bank loses out on that extra income.