Borrowers turn to flexible loans as Bank of Canada's rate cuts drive down costs
The Bank of Canada’s recent decision to lower its key interest rate has sparked a resurgence in variable-rate mortgages, a loan type that had fallen out of favour during the rate-hiking phase.
The central bank’s rate cut prompted major commercial banks to reduce their prime rates, which directly impact the costs of variable mortgages. The reduced rates are encouraging borrowers to take advantage of the flexibility these loans offer, particularly those who believe the central bank’s easing policy will continue.
Toma Sojonky, a mortgage broker with Verico Paragon Mortgage Group in West Vancouver, noted a shift in borrower sentiment.
"I think there are folks who understand that the pendulum is swinging the other way," Sojonky said, referring to the cooling interest rate environment. He added that borrowers are reconsidering variable-rate loans as a viable option in the current climate.
Variable-rate mortgages are often seen as a riskier choice due to their fluctuating nature. However, for borrowers who are willing to take the gamble, these loans offer a potentially lower long-term cost if rates continue to fall.
"We've lived through the worst of it, and now we're on the other side," Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, told CTV News. "So let's look for the benefits and the benefit is, if they go variable and the rates go down, they're going to live the benefit."
The prime rates tied to these mortgages are currently higher than the rates for fixed-rate loans. But Leduc noted that this is an unusual situation, driven by expectations that future rate cuts will reduce the cost of borrowing for those with variable-rate loans.
Leduc emphasized that while rates may continue to fluctuate, those choosing variable-rate mortgages now could see their payments decrease as the Bank of Canada’s policies take effect.
Sojonky has also observed an improvement in the discounts lenders are offering for variable-rate mortgages.
"Previously in the winter or last fall, we saw discounts to prime as low as 0.15 to 0.3, whereas now we are beginning to enjoy discounts to prime that are approaching one per cent again," he said.
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One of the key advantages of variable-rate mortgages is their flexibility. Leduc pointed out that these loans are often easier and cheaper to break than fixed-rate mortgages. While fixed-rate loans typically come with hefty penalties for breaking the term early, the cost of breaking a variable-rate mortgage is usually limited to three months of interest.
Though borrowers rarely plan to break their mortgage terms, Leduc noted that about half end up doing so. With variable-rate loans, the financial hit is generally smaller, making them appealing to those who may need to renegotiate their mortgage or make a move before the end of the term.
Since the start of the pandemic, borrowers with variable-rate mortgages have experienced dramatic swings. When the Bank of Canada slashed rates in 2020, these borrowers enjoyed lower payments, fuelling the popularity of variable-rate loans. But as rates shot up in 2022, those same borrowers saw their costs rise sharply.
Now, with three rate cuts already implemented this year and the potential for more on the horizon, borrowers are once again looking to variable-rate mortgages as an option to save in the long term.
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