Its time to start paying off my student loan to the Canadian government.
I have the option of fixing my interest rate at Prime + 5%, or leaving it variable (which is currently Prime +2.5%).
What would you say is the smarter decision?
Posted Feb 17, 2012, 5:34 PM UTC
When I started paying off my loans here's how I looked at it:
In 2010, the overnight interest rate was at 1%. However the general sense was that the economy wasn't the greatest and the rate was likely to stay the same. I decided to go with the variable interest rate, get the lower monthly payment, and sock as much money as I could towards the loan while the rate was low. If rates were going to skyrocket, switch to fixed.
For you, as v1nny says, the interest rates are expected to stay low. Indeed, the US has committed to keeping interest rates low for the next two years. So what I would do is keep the variable rate to save a bit on interest while you're starting out, and once you're established (in the next two years hopefully) with better/more stable income, keep an eye on the BOC interest rates and decide if you want to switch to the fixed if you see them going up substantially.
Another option is to stay with variable and try to pay off the loan ridiculously fast so it's done before interest rates change. That's really what I've done.
It depends on how long you expect it to take to pay off your loans. Interest rates are expected to stay low for at least another two years (though this isn't guaranteed).
I would definitely say I expect to be paying off my loan for the next 5-10 years.
Then probably the variable rate. Given the spread between the two, I'd go for the variable rate.
However, let's be real: do you see a material difference in your life between prime +5% and prime +2.5%? If no, then just go with the fixed.
cool! thanks for the advice