Under current conditions , only after you think about what house prices, your credit rating and your employment status will be down the line should you worry about where interest rates will be in one, three or five years.
Economists expect rates to remain low for a year or so, then rise 2% to 3% as the effect of stimulus packages cause an increase in the consumer price index. A major aspect of the fixed-variable decision has always been risk management, which, in the past, meant figuring out how much risk were you willing to take on so savings in the short-term would outweigh possible increases later. “Risk management is a collection of issues.
The problem, especially in the United States, was wanting to get everybody in a house. But there might be certain people who might be better off renting,” says Moshe Milevsky, finance professor at York University and executive director of the Individual Finance and Insurance Decisions Centre.
When deciding on whether a fixed or variable rate is right for you, Dr. Milevsky found that 77%-90% of the time people pay less interest over the long-run by choosing a variable-rate mortgage. But also note that 10-23% people did well with a fixed rate as well.
If your in the market for a mortgage, consider mortgages that are part fixed and part floating which gives you interest rate diversification. You could also consider an all-in-one and roll your mortgage and other debts into one low-rate loan. Dr. Milevsky says the benefits of these accounts “compound over time” and are “larger than you’d expect.”
In general, “if you have a lot of assets, I would go with the lowest possible rate,” he says. That’s true whether it’s a fixed rate or a variable rate.
However, folks with a small amount of equity (like many first-time homebuyers), or those with low or unstable income, should focus on “locking in at a low fixed rate.”