You are about to obtain your mortgage or to proceed with your mortgage renewal and you are wondering what to choose between the fixed rate and the variable rate? Our mortgage brokers are here to advise you!
What is a variable rate?
The variable rate is a mortgage loan with a rate that fluctuates according to the prime rate of your bank (at the end of September 2022, the rate is 5.45%) which itself fluctuates according to the Bank of Canada’s key rate.
Depending on the mortgage product chosen (insured, conventional, …), you will get a discount on this rate (for example Prime Rate – 0.80% or 4.65%). However, this is not always the case. Sometimes there are rate increases, for example 5.45% + 0.05%.
This rate may fluctuate depending on the Bank of Canada’s prime rate.
Capped variable rate
A capped variable rate mortgage is a loan that you pay with a rate that fluctuates with the market without ever exceeding the established cap.
This option allows you to take advantage of rate decreases, while protecting you from interest rate increases.
Variable rate: often the most advantageous
Many economists believe that the variable rate is more advantageous in the long term than the fixed rate. In addition, with a variable rate, the penalties are lower in case of breakage of the mortgage during the term.
However, since 2022, and due to the economic situation, the Bank of Canada has proceeded to several increases in its rate, and economists expect increases to counteract inflation.
However, we encourage you to contact our mortgage brokers who will advise you based on your financial situation, the current economic situation, and your risk tolerance.
Is it possible to make fixed payments with a variable rate?
Some banks offer a fixed monthly payment option with a variable rate:
- If your interest rate drops, you will pay more principal and less interest on your mortgage.
- If your interest rate increases, you will pay less in principal and more in interest on your mortgage.
- If rates increase significantly (e.g. +2%)
The lender may adjust the mortgage payments.
By opting for fixed payments with a variable rate, you will certainly have fixed payments but rate fluctuations will impact the balance due at the end of the term, and the duration of the amortization.
It is possible in case of an increase :
- or increase your mortgage payments to maintain the same amortization period.
- Refinance your mortgage to extend your amortization period and change to a fixed rate to keep your payments lower (e.g. from 22 years to 30 years)
The Variable rate is suitable for you if:
- You want to immediately take advantage of a lower rate with possible decreases during your mortgage term.
- It is important to be able to handle variations in payments.
What is a Fixed Rate?
The fixed rate is a rate that remains the same throughout your mortgage contract with your financial institution, over a chosen term of 1, 2, 3, 4, 5, 7 or 10 years.
The fixed rate is right for you if:
- You prefer to pay the same monthly payments throughout your contract
- You want to have a stable budget for your mortgage payment
- You want to protect yourself from any possible increase in interest rates.
Reimbursement
By opting for a fixed rate mortgage, you commit to making identical payments according to the payment frequency you choose (monthly, bi-monthly, bi-weekly, weekly, etc.)
What is a blended rate?
Blended rate allows you to combine your variable mortgage rate for one portion of the loan with a fixed rate portion for another.
The blended rate is suitable if you want to dilute the impact of rate increases on your payments.
Factors driving rates in 2022 – 2023
There are several factors that will drive mortgage rates in 2022 – 2023.
Variable mortgage rates
Fluctuations in variable mortgage rates depend on your bank’s prime rate, which in turn depends on the Bank of Canada’s key interest rate.
So if the prime rate goes up, variable mortgage rates go up as well.
The key rate was increased again on September 7 to 3.25%, bringing the prime rate to 5.45%.
The prime rate is the basis for calculating mortgages at 5.45% and for which economists are announcing additional increases of 2% in the coming months.
The reason for this increase is the Bank of Canada’s desire to counteract rising inflation.
Fixed mortgage rates
Fixed mortgage rates are dependent on Canadian bond rates, which fluctuate with the financial markets.
What to do when fixed rates fall?
- Change the type of rate from a variable rate to a fixed rate to secure a low rate.
- Renew your mortgage before the end of its term (subrogation, or transfer) while keeping the remaining amortization period.
What to do in case of a rate increase?
In the event of a rate increase, you have several options:
- Assess your expenses to determine your budget and see if there are any savings.
- convert your variable rate into a fixed rate according to the current rates
- Accelerate your mortgage payment in one lump sum or in regular installments when rates are low to reduce the cost of borrowing.
Variable or fixed rate: Other factors to consider before choosing (in 2022 – 2023)
Down payment
Another factor to consider when choosing your rate is the amount of down payment you bring in. Ask your mortgage broker for advice!
Economic conditions
Another factor to consider in your choice is the economic situation. With inflation due to the various political and economic conflicts, the key rate is only increasing to compensate for this inflation. Currently, the key rate is 3.25% with a prime rate of 5.45%.
The variable rate is dependent on the Bank of Canada rate.
An increase in the policy rate results in an increase in the prime rate and therefore an increase in the variable rate. Similarly, the fixed rate depends on the bond market.
It is best to have a mortgage broker accompany you in your choice of rate.
Move in or rental investment
In order to make your choice for your rate, you must also take into account the objective of your real estate purchase. Do you want to buy a new property to live in or for rental investment purposes? We advise you to contact one of our brokers who will help you choose between the fixed and variable rate.
Variable or fixed rate: What to choose?
We advise you to carefully evaluate your financial situation, your risk tolerance and your priorities.
If you prefer to have financial stability, we advise you to opt for a fixed rate.
If you want to limit mortgage penalties, and you think rates may go down, we recommend that you choose a variable rate.
However, every situation is different. The best thing for you to do is to discuss it with one of our mortgage brokers to determine which rate is best for you.
