In recent times, variable mortgage rates have been largely overlooked due to a significant increase in policy rates. However, the current landscape suggests that it might be time to reevaluate variable rates for potential future savings. #variablerates #fixedrates #ratehikes #inflation
The Nature of Variable Rates
A variable-rate mortgage entails monthly payments that fluctuate in response to changes in the bank prime rate, which, in turn, is influenced by the Bank of Canada's policy rate.
The 5-year variable rate, once seen as a viable savings option compared to the typically higher 5-year fixed rate, has experienced reduced interest among our mortgage clients. Variable rates have undergone a rigorous climb to combat high inflation, marking the fastest upward trajectory since the 1990s.
If variable rates have indeed reached their peak, there could be savings to be had on the way down.
Have Variable Rates Reached Their Limit?
The question on everyone's minds is whether variable rates have completed their ascent. While we cannot predict the future with certainty, it is worth noting that the Bank of Canada's policy rate is currently at its highest since April 2001, and we have been on this rate-hike journey for 18 months. The anticipation for the signal to descend is growing.
The Popularity of Fixed-Rate Mortgages
In July 2023, following two more rate increases by the Bank of Canada, clients exhibited a notable shift towards fixed-rate mortgages. Approximately 84% of our clients chose fixed-rate mortgages, surpassing the average by about 25%. This is a stark contrast to March 2022, when variable rates were at their lowest, and less than 40% of our clients opted for fixed rates. Typically, the uptake for a 5-year fixed rate hovers around 60%.
The preference for fixed-rate mortgages is evident, with many borrowers wary of the uncertain path of rate hikes as the Bank of Canada addresses inflation and consumer spending. Furthermore, variable rates, including discounts offered off the prime rate, have often been less competitive than fixed-rate options.
Considering a Variable-Rate Mortgage
If we are indeed at the peak of Bank of Canada rates, a variable-rate mortgage could provide a quicker path to budget relief. However, several factors come into play, including the fixed term length you are comfortable with, the rate you would pay while waiting it out, and how soon and how significantly variable rates might decrease.
In recent times, there has been growing interest in shorter-term fixed rates, despite their higher cost compared to 5-year fixed rates. Borrowers are eager to avoid hefty payout penalties and are hopeful of securing a lower rate sooner. However, if a variable rate offer matches or is lower than a short-term fixed rate, your payments could decrease sooner if rates take a downward turn.
The allure of variable-rate mortgages lies in their potential for savings over the life of the mortgage, despite the peaks and valleys along the way. However, they also come with an element of risk and uncertainty.
Ultimately, your choice between fixed and variable rates hinges on your risk tolerance and your confidence in rate movements. Fixed rates offer payment stability during your term but leave your renewal rates uncertain. In contrast, variable rates, if timed well, can provide immediate savings when rates decrease.
Navigating these options in a fluctuating market can be challenging, but our expert mortgage brokers at MortgagePal are here to assist you in finding the best rate and guiding you toward maximum savings with minimal stress.
Take your time to decide, especially with the lowest fixed rate available in Canada.
Trust in our experienced, salaried mortgage brokers to swiftly identify your best rate and help you make an informed decision between fixed and variable rates. Your mortgage payment is a significant commitment, and our guidance can lead you to greater savings with less anxiety.
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