The fixed-vs-variable debate is rearing its head again
It’s an age-old question for borrowers in Canada’s mortgage market: fixed or variable rate?
While Bank of Canada rate hikes in recent years have seen buyers and homeowners gravitate increasingly towards the security of fixed options, the prospect of cuts at some point in 2024 has raised the question of whether the pendulum could swing back once more in the direction of variable.
The Bank of Canada policy rate, which leads variable interest rates in Canada, continues to hover at 5%, its highest level since 2001, while fixed rates have fallen precipitously since October (despite a general upward trajectory since the end of 2021 and turbulence in recent weeks).
The greater upfront savings potential and lower payments associated with a shorter-term fixed rate mean those options are seeing the highest uptake in the current market, according to RATESDOTCA mortgage and real estate expert Victor Tran (pictured top), although that’s not to say variable rate types have fallen by the wayside completely.
“Three years fixed is still by far the most popular choice, but I’ve actually been renewing a lot of my former clients where they came out of variable rates and they chose to renew, again, into a variable rate,” he told Canadian Mortgage Professional. “Their renewal rates are pretty decent.”
Clients renewing into variable options are seeing rates of around 6% or 6.1% at present (prime minus 1.1% or 1.2%), Tran said – meaning that if the central bank drops rates by a full percent by the end of this year or the middle of 2025, “that would drop the rate to 5%, which is a little bit lower than the three-year fixed that they were offered on the renewal, which is currently hovering around 5.29% to 5.49%, depending on the situation.”
Where borrowers see themselves being ahead on the variable rate compared with fixed if the Bank of Canada cuts rates three or four times, they’re often comfortable paying slightly more now in the expectation that they’ll ultimately be better off in the long run, according to Tran.
Markets are currently pricing in multiple rate cuts by the central bank between now and the end of the year, with expectations hardening around a cut by the middle of 2024.
Dominique Lapointe from Manulife Investment Management suggests that BOC may not lower rates immediately, as mortgage costs are likely excluded from key inflation measures.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 30, 2024
Read more: https://t.co/SfoMkeElHx#mortgageindustry #marketupdates #interestrates #inflation
How are borrowers coping with higher mortgage rates at renewal?
Another prominent theme in the mortgage market this year has been the reality of borrowers facing renewal at significantly higher rates than their original level – but there’s little sign of a major storm brewing on that front yet.
“Personally, I haven’t had any clients that are running into difficulty with making the new, higher mortgage payments,” Tran said. “I haven’t had any clients ask about refinancing for longer amortization to drop the payment, or even extending amortization from the current lender – they’ve all been doing OK.
“And I think that’s safe to say for the majority of homeowners across the board. There’s definitely a small percentage of people that are running into financial difficulty, but for the most part I feel like Canadians are quite resilient and they’re holding onto it, and making the higher payments – I wouldn’t say with ease, but they’re managing.”
What borrowers should keep top of mind amid “bumpy” start to year
Top of mind for borrowers should be proactivity and shopping around for the best rate possible at renewal time, particularly with 2024 to date having seen sizeable fluctuations and some unpredictability for the direction of fixed rates.
Amid that rocky beginning to the year, taking advantage of the opportunity to lock in a rate for up to 120 days (four months) prior to the maturity date is a good idea for borrowers, Tran said.
“That’s exactly what current homeowners on renewal should be doing: start the research early, lock in the rate early,” he said. “If the rates go down, and that’s great, they can simply request for that lower rate to be applied.
“If the rates go up, then that’s going to mean they already have something locked in and it’s not going to impact on rate – because I think it’s still going to be a bumpy road ahead.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
