The answer to the age-old question of whether to go long or short on your mortgage is unclear yet again.

The popular variable-rate product tied to prime that helped people buy a lot more house with more debt is going up. The prime rate at the major banks, which tracks the Bank of Canada’s rate, is now at 2.75%.

At 2.05%, a variable-rate product today may look as attractive as ever, but the five-year fixed-rate closed mortgage is falling fast. It can now be had for under 4%.

Bank of Montreal senior economist Sal Guatieri does agree that variable-rate products have worked out better than fixed-rate mortgages throughout history, but says the tide may be turning.

Bank of Montreal is forecasting another 25 basis point move in September and says rates will climb another 1.5 percentage points by the end of 2011. If Mr. Guatieri and others are right, by 2012, the variable-rate products out today would clock in at just above 3.75%, if the discounting remains the same.

“If you are still in that variable-rate product then, you’d have to sweat out the next three years because there would still be possibly more increases,” says Mr. Guatieri, who adds his bank sees the overnight rate eventually going to 4% in the following three years. Based on the present gap between the Bank of Canada and prime, that would place the variable-rate product you get today at 6% by around 2015.

Fears of such a scenario are driving people into fixed-rate products again. That, plus new mortgage rules that make it easier to qualify for a mortgage if you go for a fixed-rate product with a term of five years or longer.

For updated rates and more information on the right mortgage for you please visit www.designermortgages.ca/rates.htm or call 1-866-824-8057

Source: Garry Marr, Financial Post • Tuesday, Jul. 27, 2010