Navigating between a fixed and variable-rate mortgage has long been a testing decision for prospective homeowners or those looking to refinance their loans. However, with interest rates currently observed in the home loan market that haven’t been seen for many years, the implications of this decision are particularly consequential.
The appeal of variable-rate mortgages took a hit as the Bank of Canada raised interest rates, which resulted in a sharp rise in the cost of loans pegged to the prime rates of the major banks. Parallelly, the costs of fixed-rate mortgages have also surged from their initial lows during the pandemic.
Frank Napolitano, a co-founder and mortgage agent at Mortgage Brokers Ottawa, highlighted that he has continued to witness borrowers choosing the variable rate. He recalled a recent incident where a client battling with a variable-rate mortgage chose to persist with it after consolidating some other debt and increasing the loan’s term.
This client, Napolitano noted, was content with his decision to go with the variable-rate option, and comfortable with the set payment schedule for 25 years. The client held the belief that the rates had likely peaked and was hopeful that the interest rates would decrease considering the struggles of many borrowers. He contemplates locking in his rates but has expressed his desire for them to fall before taking this step.
Variable rate mortgages, Napolitano points out, typically come with less stringent penalties than fixed-rate options if one finds themselves needing to exit the loan early.
Historically, variable-rate mortgages have been slightly cheaper than the fixed-rate offerings. However, recent data from rate-comparison website Ratehub.ca shows that the rates for five-year variable-rate mortgages are now higher than those for the five-year fixed-rate equivalents. As a result, banks will need to bring down their prime rates for borrowers with variable-rate mortgages to reap savings over a five-year timespan.
Due to these changes, prospective borrowers must pay considerable attention to potential adjustments to the interest rate by Canada’s central bank when deciding between a variable or fixed-rate mortgage.
The Bank of Canada, in its most recent interest rate announcement, held its key rate firm at five per cent. However, it signaled its readiness to further increase rates to align inflation with its two per cent goal.
Van Rooijen, vice president of consumer credit at Meridian Credit Union, advises prospective buyers and borrowers approaching their renewal date to start with their budget. She suggests a thorough evaluation of monthly expenses followed by a calculation of potential mortgage payments using an online calculator.
Van Rooijen notes that the current rate environment is significantly different from just a few years ago and sees many clients choosing to lock in a rate for a term shorter than the traditional five years, waiting to see the trend in interest rates. She believes the crucial factor is for borrowers to choose the right loan for their particular situation, as every individual’s circumstances are unique.
Van Rooijen emphasizes that regardless of the chosen path, it’s important to seek personalized advice from a finance professional, be it from a credit union, bank, or a mortgage broker. She encourages borrowers to understand that each situation warrants a unique solution, which can be aided by the guidance of a financial expert.