Mostly shunned during a meteoric rise in rates, a variable rate may warrant a second glance for forward-looking savings.
The 5-year variable mortgage rate, once a credible savings option compared to a (typically) higher 5-year fixed rate, has seen decidedly low uptake among mortgage consumers due to the obvious — the hiking of variable rates by the Bank of Canada.
The fixation on fixed-rate mortgages
In July 2023, after the BoC un-paused its rate pause to deliver two more rate increases, True North Mortgage, one of Canada’s top mortgage brokerages, saw 84% of its clients choose a fixed-rate mortgage over a variable one — about 25% above average.
Interest rate volatility has pushed the variable rate mortgage (with payments that change along with rate movements) out of favour with Canadian homeowners for the most part, especially first-time home buyers.
Yet this mortgage rate type may offer the quickest budget relief once rate increases are in the rear-view mirror.
Have variable mortgage rates peaked?
Everyone would love to know the answer to this question. What we do know is that the BoC’s policy rate is the highest since April 2001, and we’re now 18 months into this rate-hike cycle.
Many experts believe the BoC’s rate has climbed the mountain to (or almost to) peak, and the next journey is the climb back down.
If we’re (finally) at the height of BoC rates, would a variable-rate mortgage offer a faster route to a budget break?
That depends on many factors, such as the fixed term length you’d choose to wait out these higher rates, the rate you’d have to pay to wait it out, and how soon and how far variable rates would come down.
The recent attraction to fixed rates has been for terms shorter than 5 years. Even though the rate for a 2- or 3-year term has been higher than a 5-year, many want to avoid costly payout penalties to possibly get into a lower rate sooner (fingers crossed) and are willing to live with the higher mortgage payment.
However, if your variable rate offer is the same or lower than a short-term fixed rate, your payments could decrease sooner if rates drop, instead of waiting for the fixed term to end to benefit from lower rates. (Assuming you have an adjusting payment variable-rate mortgage instead of a static one with a Big Bank that changes your amortization instead).
The allure and the peril of the variable rate mortgage: its risk for change (and potentially more savings)
True North’s July numbers of 84% is a high skew for fixed-rate choice, considering how close variable rates may be to the top — and historically, variable rates tend to save homeowners more over the life of their mortgage (hitting peaks and valleys along the way).
In the current market, if your best variable rate offer is higher than a fixed one that fits the bill — you’d be choosing to pay more, plus take on the risk that the rate hikes may continue for longer (weather and rate predictions are two things uncertain in life).
But if rates are coming down in the future and you can handle the payments until then, you may feel you’re siding with savings in taking on a variable-rate term.
Your choice of rate type comes down to how well you sleep at night:
- Knowing that with a fixed rate, your mortgage payments (or amortization) can’t change during your term, you’ll take your chances on what rates will look like at renewal or,
- Believing that rates will come down eventually, you’d rather take the ‘variable’ chance to benefit from lower payments the moment they do.
Navigating your options to keep your mortgage goals on track amid turbulent market conditions can be difficult. It’s essential to look at all your options and use an expert mortgage broker to shop around for your best possible rate to save as much as you can.
Sleep on the decision a little longer with the lowest fixed rate in Canada.
True North Mortgage offers an ultra-low, 6-month fixed rate product that can help you defer your rate decision and possibly renew into lower rates by then.
It’s only for switches and new home buys (other restrictions may apply), and you can choose any other term or rate type at renewal — they’ll help you decide if it’s the right fit for your situation.
Get the right guide for your best-rate trek.
Your mortgage payment is a big commitment; higher rates can drive that home. An expert, salaried True North Mortgage broker can quickly find your best rate and outline your fixed vs. variable rate decision points, guiding you to the most savings with the least stress.
With over 13,000 5-star reviews and counting, True North is standing by to help you online, over the phone, by email, or drop by a store near you.
Fast, expert mortgage advice can make the difference, saving you money and time. It’s a no-brainer. Contact Canada's No. 1 Mortgage Broker today.