In an era of rising interest rates, homeowners are grappling with a crucial decision: should they opt for a fixed-rate or a variable-rate mortgage? With rates reaching levels not seen in decades, the decision is more critical than ever.
Falling Favour for Variable-Rate Mortgages
Bank of Canada’s interest rate hikes have pushed the costs of loans, especially those linked to big banks’ prime rates, through the roof. Variable-rate mortgages, which were once a popular choice, have lost their lustre due to these hikes. This decline comes even as fixed-rate mortgages have seen their costs surge from lows during the pandemic.
Frank Napolitano, co-founder and mortgage agent at Mortgage Brokers Ottawa, noted that despite the increasing costs, some borrowers still prefer a variable rate. Highlighting a particular instance, he shared about a recent client:
“He’s decided he’s going to go variable only because he believes that the rates are now probably at the peak and the payment that’s been set up for him at 25 years is something that he’s very comfortable with,” Napolitano said. “He’s hoping that with so many people struggling that the interest rates are going to come down and then he will consider locking it in, but he wants rates to come down a little bit before (then).”
Napolitano also pointed out a noteworthy advantage of variable-rate mortgages: they generally come with less severe penalties than their fixed-rate counterparts, especially if borrowers need to exit their loans prematurely.
Recent data from rate-comparison website, Ratehub.ca, underscores the changing dynamics in the mortgage market. The rates for five-year variable-rate mortgages have now surpassed those of five-year fixed-rate options. For variable-rate borrowers to gain any financial advantage over a five-year term, banks would need to decrease their prime rates.
This ongoing rate volatility has turned the spotlight on future decisions by Canada’s central bank. Their recent decision to maintain the key rate at five per cent was accompanied by a clear message: they’re ready to hike rates again to achieve their two per cent inflation target.
For those with variable-rate mortgages, this could signal further rises before any potential drop, possibly resulting in increased monthly payments or a need to stretch the amortization period if rates climb.
The Fixed-Rate Attraction
With the turbulence surrounding variable rates, fixed-rate mortgages have re-emerged as a preferred option for many Canadians seeking monthly stability and peace of mind.
However, there’s a catch: present fixed rates are at their highest in recent times. Borrowers who enjoyed the advantage of being locked in over the past 18 months now face a conundrum. If they lock in again at these elevated rates, and rates subsequently drop, they’re bound to their current rate for the loan’s duration, unless they’re willing to bear the penalty to break their mortgage.
Expert Advice: Start With a Budget
Amidst this uncertain rate environment, Allison Van Rooijen, vice-president of consumer credit at Meridian Credit Union, offers some sage advice:
“My best advice is to start by just jotting down your real-life expenses … everything you actually spend in a month and then use an online calculator and figure out what type of mortgage payment you could be facing,” she advised. “Do that well in advance of your renewal so that when you do talk to your financial services professional, you’re going in eyes open.”
Van Rooijen emphasizes the importance of bespoke financial guidance.
“Every borrower has a different scenario based on where they are in their life, their home, and their goals,” she pointed out. “Whether it’s a credit union, a bank, or a mortgage broker, seek out personalized advice because every situation is so different.”