February 24, 2018

Fixed vs Variable Mortgage Rate Mistake

In the fixed-versus-variable mortgage rate debate, one cannot argue that historically, variable rates have been a better long-term option. There’s still some risk associated to the variable option if interest rates happen to rise. With the fixed option, you are basically offered to pay a premium to kind of take out that risk.

But things are not that simple and obvious. In practice, rates would have to rise fast and rise a lot to really hammer down the variable option and make it the worse choice. In the end, in most cases, the fixed rate premium may simply be too costly. At least, that’s what we learned from our personal experience.

To make a long story shorter, we started our mortgage life using the optimal variable-rate option for the first 5 years. In 2006, we switched to a fixed rate afraid of a hike. In fact, that dreaded eventuality only manifested itself timidly more than 10 years later, in 2017. Choosing the fixed option was a mistake. That huge misstep cost us about 10K$ only in interest in the following 5 years. Because the amazing power of compound interest works both ways, our mistake surely cost us thousands more since then.

Drawing conclusions may be easy after the fact, but this is a classic case where your emotions get in the way of sensible financial decisions.

In late 2010, we were already convinced about Variable Rates being The Right Long-Term Choice For Our Mortgage yet we struggled and still made what appears like the safer choice locking in a fixed rate for 5 more years.  With retrospect, that decision was not as bad because the spread between variable and fixed rates remained much smaller. In the end, it looks like it will cost us only a couple hundred dollars more.

The great news is that our mortgage is now virtually paid off, eliminating additional opportunities to make the same mistake again and again.

Still on the bright side, we are doing very well financially despite several mistakes of the same magnitude. It looks like it's not about being perfect, but rather more about learning, working thru it and being good on average. 

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