According to most mortgage brokers today, fixed rate mortgages are outnumbering variable rate mortgages. Until a few years ago, variable rate mortgages were the savvy homeowner’s go to choice, where the homeowner typically paid a lower interest rate for a variable rate compared with a fixed rate, and the borrowing costs would adjust when the Bank of Canada changed its overnight rate.
Since the summer of 2017, the Bank of Canada has been nudging up interest rates. We now have short, medium and long term interest rates that are very close to each other. Normally the rates go up as you go from short to medium to long-term rates.
Variable rates are influenced by short-term rates and fixed term rates are influenced by longer-term rates. If both rates are similar then the cost advantage of variable rate mortgages is weaker, as the risk reward trade off is not as compelling.
One can still consider variable-rate mortgages if one believes that the economy’s weak spell in early 2019 signals a slump that will require the Bank of Canada to cut rates. It is possible that this happens and if it does, variable-rate mortgage holders will end up saving money. However, currently there’s not enough reward to offset the risk of higher rates down the line.
Another reason why some borrowers go variable is to do with the penalties of breaking a mortgage before the end of its term. The penalties for breaking a fixed-rate mortgage at large banks are quite severe, but penalties on variable-rate loans are more modest.
When interest rates return to a normal, expect variable-rate mortgages to regain their appeal. For now, homeowners seem to agree that fixed is better.
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