Mortgage of $250,000, amortized over 25 years, term of 5 years, monthly payment.
Option 1: Variable mortgage at P-0.75% (assume prime rate increases by 0.5% every year for 5 years)
Option 2: Fixed mortgage at 3.39%
Results:Variable - balance at renewal $207,625.45
Fixed - balance at renewal $210,124.31
The results show that variable saves $2,498.86. Although variable is less costly, some might find the fixed provides a sense of security due to their personal cash flow situation and no one really knows what will happen to prime rate over the next 5 years. Keep in mind, with the recent $600 billion quantitative easing move by the US Federal reserve, the Canadian dollar will maintain a high exchange rate, limiting Bank of Canada's appetite to further increase its benchmark lending rate which will push the dollar higher and have a negative impact on Canadian exports. Until the US economy starts to expand and the US Fed Reserve priority shifts from stimulating the economy to moderating inflation, Bank of Canada will be reluctant to have its prime lending rate too far from the US. Time will tell.....