Fixed vs variable mortgage rates? Experts offer guidance on mortgage renewal options
Homeowners with upcoming mortgage renewals are grappling with a crucial decision following the Bank of Canada's (BoC) recent interest rate cut: should they choose a variable rate or lock into a fixed rate?
The BoC's quarter-point reduction, the first in four years, is prompting some lenders to lower their variable and fixed rates. This newfound affordability could stimulate the housing market, but experts believe further rate cuts may be needed to sustain this momentum amidst a weakening economy.
“Renewals have been a hot topic for a little while now,” Victor Tran, mortgage and real estate expert at financial products comparisons site RATESDOTCA, told The Globe and Mail.
This slow-moving approach by the central bank presents a challenge for those with upcoming renewals.
The dilemma is whether to lock into a fixed rate like a competitive three-year rate at 4.95%, accepting higher short-term costs but stability. Or to choose a much higher variable rate around 6.2% currently, gambling it will quickly decline thanks to future Bank of Canada cuts.
Given the anticipated slow pace of rate cuts, Tran estimated it would take over a year for the variable rate to fall below the three-year fixed rate.
Many borrowers are now steering away from five-year fixed-rate mortgages, which used to be the default choice for many mortgage shoppers. “I haven’t done a five-year fixed in quite some time,” Tran said.
The Bank of Canada’s quarter-point rate drop, the first since March 2020, is already nudging variable mortgage and credit line rates down. Depending on loan type, rate, and amortization, most floating-rate borrowers are seeing monthly payment decreases ranging from $12 to $21 per $100,000 of balance.
Frances Hinojosa, CEO of Toronto mortgage brokerage Tribe Financial, agreed that three-year fixed rates remained an attractive and popular option. However, she cautioned that breaking a fixed-rate mortgage can become more expensive in a declining interest rate environment.
"If rates go down and your rate is much higher, you're very likely going to be looking at an interest-rate differential in the penalty, which could be tens of thousands of dollars," she said.
Both experts advise against rushing into a renewal many months before maturity, as rates are expected to drift lower. Getting a 120-day rate hold from a lender provides flexibility.
Read next: Fixed-rate borrowers brace for Bank of Canada rate decision amid mortgage renewals
Hinojosa also noted that insured mortgages requiring mortgage default insurance also have increased options at renewal time. These loans don’t have to pass the federal stress test to qualify for a renewal with a different lender.
The stress test usually requires borrowers to qualify against rates higher than the contractual mortgage rate offered. However, for insured mortgages, homeowners can qualify with a different bank based on the actual rate offered, even if they have accumulated equity worth 20% or more of their home’s value.
“You can actually qualify at another institution using the actual contract rate – the actual rate that you are getting,” said Hinojosa.
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