The macro mortgage approach

I thought I had a big decision on my hands. Turns out, I don’t.

With the closing date for my new home rapidly approaching, I am facing the timeless dilemma experienced by all home buyers: do I go with a variable mortgage, or fixed?

I have a choice between a five-year fixed rate of 3.49% or a variable rate of 2.40%. Both good options. In normal times, historical data clearly show that going variable saves you money.

However, these are not normal times.

Looking at historical interest rates, it seems that we are at the end of a long cycle—seventy-six years, in fact. In 1935 interest rates were at 2.5% and began a slow climb, (with a few spikes and falls along the way) to just under 10% in 1976. In 1978 they spiked rapidly, peaking at around 21% in 1981. It’s been largely downhill ever since, leading us up to today’s rate of 3%.

To say this puts things in perspective is an understatement. For starters, were I house hunting anytime between 1969 and 1993, this blog would have a far less jovial tone.

More importantly, viewing the issue from such a macro perspective reveals that rates aren’t likely to move lower for awhile. Our economy has emerged from recession but can’t seem to find its footing, and the U.S. is still flirting with a dangerous double-dip recession. This has Bank of Canada Governor Mark Carney concerned enough that he’s brought interest rates down to ridiculously low levels to encourage growth.

As a home owner, I like that.

However, Mr. Carney has recently (and repeatedly) warned that low interest rates are tempting Canadians to overspend on big ticket items, which could lead to a housing bubble or a household debt crisis. To avoid this, he says he’ll raise interest rates as soon as he possibly can. Most analysts say mid-2011, but these days, who knows?

I don’t like that so much.

So with a choice of two mortgage products that differ by slightly more than one per cent, the looming rate hikes are kind of scary to me. Everyone agrees that rates have nowhere to go but up, and the only force that would push them down further would be another recession—also scary.

So without getting into the details (that’s for the next blog post) I have to say I’m strongly leaning toward a fixed rate. Everyone I’ve spoken to (all home owners) agree that it seems like tempting fate to try and ride out a variable rate for the next five years.

On a side note, they’re all jealous of my fixed rate.

I like that.