Mortgages: Fixed vs Variable (Wots....Uh The Deal?)

It isn't difficult to find a sea of information on this topic. Most leads to the conclusion that over an extended period of time one is always better off using a variable rate mortgage over a fixed rate mortgage. However, why do statistics show that eight out of ten mortgages are done on a fixed rate?

Am I missing something here???

I found a study done in 2001 at York University that concludes that over the period of 1950 to 2000 on a 15 year mortgage one would have saved an average of $20,000. That isn't pocket change. Three years later the same professor revisited the study given the climate at the time and came up with the same conclusion.

So what is it that is making so many people lock into fixed rate mortgages? The answer is emotional: stability. The idea of warding of the risk of any unplanned spike in the current interest rate. Generally people feel more at ease when they can sleep at night knowing what their payments are and what they will be over a given period of time.

However, let's explore some ideas associated with this 'stability'. Have a look at this. Another statistic showing past proof as to why variable is the answer.

Here's some other reasons:

I believe wealth is attained by proper planning and reducing the amount of money that goes to tax and/or institutions. One thing that is not often explored in the argument of fixed vs variable rate mortgages is the idea of 'front end loading'. Often this is a term associated with mutual funds. However, let's look at it in the context of mortgages:

Fixed rate mortgages are designed so that in the early years of the mortgage amortization the bulk of the payment goes towards interest. In the later years this payment reduces and becomes mainly principle. This means that the institution designs it this way to ensure that they are not only going to get paid first but also if you move your mortgage, refinance, or adjust your amortization schedule you will in a sense reset the front end load. The result of this is thousands of dollars over the life of your mortgage going to institutions and not into your own net worth. This compounds even more as we are seeing 30, 35, and even 40 year mortgages. Not only that but mortgage brokers get paid considerably higher on a fixed mortgage due to front end loading. Therefore consider that when taking advice.

One of the big reasons (not just money saved on interest) to explore with a variable rate is the fact that you only pay interest on what you owe. Why is this important? Variable rates are often up to one point lower than traditional fixed rates and float based on the present prime rate. This also gives you flexibility in your payment schedule. Take, for example, if you are doing a Mortgage Accelerator program. Every extra dollar that is put towards your mortgage in this scenario will result in a reduction of the interest component of your payment in the long term. Unlike a fixed schedule that predetermines the interest component for each payment of the term.

I will often tell people that one of the most important steps towards financial freedom is taking the steps to reduce the amortization time of their mortgage. Many do not realize the out of pocket money that is necessary to cover an entire amortization period and the money that can be saved be paying down the mortgage faster. Just that reason alone is enough for an average individual to take these steps. Not only that but the freedom to produce wealth, leverage your net worth, and take advantage of time becomes a major factor in looking at the positives.

If one could reduce that even more by choosing a variable mortgage over fixed rate why wouldn't they?

All the answers to all my questions come down one thing: risk vs reward.