Why You Should Probably Choose a Variable Rate Mortgage: A Data-Driven Perspective

I’m about to make a controversial statement: you should probably choose a variable rate mortgage for your next mortgage.

How controversial is this? Well, according to a Canadian Mortgage Trends article, only 21% of Canadians choose a variable rate mortgage. So roughly 4 out of 5 people disagree with the above statement. So yeah, I’m quite the revolutionary.

Warning: this data is Canadian data. If you are an American, proceed at your own risk.

Other warning: I'm not a licensed mortgage broker, mortgage specialist, loan officer, or other. I am merely an amateur mortgage enthusiast.

Backstory

I was going through historical mortgage rate data today, as I sometimes do. As I was looking at the data, I noticed that variable rates were currently lower than fixed rates.

Well, that makes sense, the whole premise is that they are lower to make up for the risk of them suddenly shooting up during your term.

But that got me thinking. If it makes sense that variable rates are lower at this point in time, when was this not the case? And the more pressing question - say you got a variable rate mortgage today - what’s the chance that in 5 years, you will have spent more on the variable rate than a fixed rate?

I like to meander through my stories, but if you want to get to the juicy stuff, feel free to skip right to “The Analysis” section.

Digging Deeper

Ratehub (see link above) has these really nice charts that break down the mortgage rates over time.

Wow. Visualizations.


But this chart isn’t exactly Excel (Google Sheets is my weapon of choice, actually) friendly. I wanted the raw data.

So I crack open my trusty browser network inspector to see if I can grab the data there.

Oh yeah, that’s the stuff.

Notice that the dates are just numbers. That’s fine, that’s just a unix timestamp. Easy peasy. That’s a one-liner script, and I get normal, human readable dates.

Some data removed for brevity.

So I go ahead and paste this data into Google Sheets. I grab the data for both the “Historical Discounted 5-Year Fixed Rates” and the “Historical Discounted 5-Year Variable Rates”.

Beautiful, clean, raw data.

The Analysis

First thing I do is take a forward-looking 5-year rolling average for the variable data. What that means is, for example, on May 1st, 2006, I take the next 60 months (there’s actually a few missing dates in the raw data, weird, but okay), and I average out the interest rate across this period.

Before I continue, I should mention that this assumes all months are equal. This isn’t actually the case, because a high interest rate at the beginning of your loan (when you have a larger loan before you’ve paid off a big portion of it) is more expensive than a high interest rate at the end of your loan. However, for simplicity’s sake, we can ignore that for right now.

Oh yeah, now we are cooking.

So, we have the rolling (forward looking) 5 year average for variable interest rates. The reason we want to calculate this is because this gives us the average interest rate over the 5 year term, which we can then directly compare against what we would have locked in for the fixed 5 year interest rate.

Things are looking pretty dire for our fixed friend.

Let’s run a quick little formula, just to pick out where we might have been wrong to choose Variable.

See above: gratuitous formula screenshot.

And the output:

Oh my.

I had set up some formulas ahead of time that would tally up all the wins for variable, and all the wins for fixed, and compare how much more you would have saved when each version “won”.

😐

The End

There you have it folks. At least from 2006 to 2016 (we can’t go beyond 2016 because then we won’t have enough data for a full 5 years), you literally always would have been worse off if you had gone for a fixed interest rate.

And what about our earlier caveat? Where a high interest rate at the beginning could cost you more than a high interest rate at the end? Well, during the same time period, there was actually only one month where the variable interest rate was higher than the fixed interest rate (it was higher by 0.15% on January 1st, 2007). There was a 9 month period in 2019 where the variable rate was more expensive, but only by an average of 0.19% - not nothing, but not much to write home about.

If you are interested in doing analysis like this, or you just find thinking differently about mortgages to be as fascinating as I do, check out Fraction's career page to join the team. Don't see a role for you or want to discuss more? Email me at josh@fraction.is.


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