As a variable rate holder, I am not the most pleased.
This is apparently a weird mostly unique to the USA thing, probably driven by complex subsidies. And that's why owning a home in the USA is such a good deal-- because it's the only way to get a 30 year fixed early-repayable mortgage, which, especially at the rates that were available for the last 15 years or so, is such an insanely good deal it's pretty much free money.
If you really think about it, why would any rational bank take this bet? If rates go up, you have an unfairly low rate and they can't do anything about it. If rates go down, they still lose because you can just repay early through a refinance. And 30 years is a long time to guarantee a rate.
The only reason a bank would offer such a crazy bargain is subsidies.
Before the 1930's, 5 year fixed-rate interest-only loans with a 50% down payment were typical in the US. At the end of 5 years the borrower would either have to pay off the remainder of the mortgage or negotiate a new loan at a new rate.
Of course this caused a crisis during the Great Depression.
During the 1930's, the Home Owners’ Loan Corporation (HOLC), the Federal Housing Administration (FHA), and the Federal National Mortgage Association (FNMA) were created to regulate and insure mortgages. Instead of 5 years, 15 years was common at first, then 20, then 30. Instead of being interest only, loans were amortized to pay off principal, instead of a 50% down payment, 20% or even 10% was common.
During the 1970's the interest rate mismatch (short term interest rates which banks used for financing rose, while their 30 year interest rates on loans were fixed) led Congress to allow FNMA and other entities to buy mortgages from lenders to get those loans off their books - that was the creation of the secondary mortgage market.
Loans were still all fixed rate though, variable rate wasn't allowed in the US until 1982 (the Garn-St. Germain Depository Institutions Act).
By the 2000's, you had variable rate mortgages, interest only loans were back, and banks could originate and then sell them into the secondary market, so they could make money on the origination (or if not that, the servicing) of the loan, while getting rid of the default risk (that was left to the US taxpayer under the guise of the supposedly private "government sponsored entities", the GSE).
Of course this caused a crisis during the Great Recession.
* https://www.ratespy.com/the-most-misconstrued-study-in-mortg...
* http://astarmortgage.com/pdf/moshe.pdf
We just happening to be in a rising rate environment currently.
There are two types of variable mortgages:
> With a fixed payment, when prime rate rises you simply pay more interest and less principal, and vice versa when prime falls. But your actual payment stays the same (unless rates soar so much that you’re not even covering the minimum interest due, which is rare).
> That’s opposed to an adjustable rate mortgage (ARM) where both your payment and interest cost vary as prime rate fluctuates.
* https://www.ratespy.com/offers-fixed-payment-variable-mortga...
> With a VRM, a rise in the interest rate leaves the regular mortgage payment unchanged but the interest charged rises and the amount of the payment allocated to pay down the principal balance drops and this means it will take longer to pay-off the mortgage. A lower rate has the opposite effect accelerating your pace of mortgage repayment.
> With an ARM, a rise in the interest rate results in a rise in the regular mortgage payment to cover the higher interest cost to ensure that the dollar amount allocated to pay down the mortgage principal remains intact. On the flip side, a drop in rates will drop your regular payment without accelerating the pace with which you repay the debt.
* https://www.mortgagesandbox.com/news/types-of-variable-rate-...
For most people, who get one mortgage on their primary home (which they live in), the potential downside if you’re in that 25% is ‘lose your house’, so it’s not unwise to go with a fixed rate that you know you will be able to pay for the life of the loan.
The VRM has no rising costs: your monthly payments are the same. It's just the amount of principle paid off each month changes:
* if rates rise (like now), less principle is paid off
* if rates drip (the 10 years before this particular moment), more principal is paid off
But what gets taken out of your chequing account would be the same.
This is definitely not the case. My mortgage payments have gone up by hundreds of dollars per payment.
But going long term fixed means you're in a forecasting competition with the bank. It's no gimme.
One factor for the decision was that as a first time home buyer, our ability to get favourable long-term rates was basically non-existent. I would expect that to change when it comes time for a renewal.
A lot of Canadians opt to try their luck with variable, especially since it's usually cheaper on average, and usually cheaper up front.
It doesn’t change nightly either. It’s in fixed windows every X months (e.g. every six months) and the maximum delta per hike or drop is usually fixed as well.
Supposedly the penalties of getting out of a fixed rate were costly, whereas they are less so (none?) with the variable flavour.
Yet, we are still here and now our payments have gone up nearly 25% :(