Written by Kelley Keehn
Tuesday, September 13th, 2022
With the recent interest rate hikes this year and likely more to come, many mortgage holders and new homebuyers are examining the age-old lending debate: fixed rate vs. variable rate.
"Right now, everything is in flux," states James Laird, Co-CEO of Ratehub.ca. "And everyone is waiting to see where this ends up. When will inflation plateau or ease? That's when we'll see more stability in mortgage rates."
But until then, interest rates are expected to continue climbing.
What are your options today?
The interest rate on your mortgage is the most significant factor that determines your monthly mortgage payment. You also need to consider if you'd like to lock in your rate for a period of time (say five years) and your mortgage amortization (the total number of years you plan to have your mortgage).
Fixed rate means that you're locking into the rate offered when you sign or renew your mortgage, and you'll know that percentage rate is guaranteed until then end of your mortgage term. Banks usually offer terms from one, to five, seven and ten years, but five year terms are the most popular. Since your interest rate is fixed, your regular payment amount will stay the same for your term.
Variable rate means that your mortgage rate is not fixed. The term is still locked in for a set number of years. Your monthly mortgage payment might not change, depending on whether your mortgage is designed with set payments. But the amount of principal or interest you're paying on your mortgage does. You can find out more about the key differences between the two in our fixed vs variable mortgage rate article.
Variable historically wins out in the long run
James notes that a 5-year variable rate mortgage is typically “1.5 to 2% less than the posted five-year fixed-rate mortgage. However, it's all about your risk level and budget. If you're not going to sleep at night because interest rates are likely to keep climbing in the near term, and you don't have any wiggle room in your budget, locking into a fixed rate may make sense for you. But if you can handle a degree of risk, even if rates continue to rise in a year or two, and it turns out that it would have been better to lock into a five-year fixed rate, remember that's only one segment of your total mortgage. If you, for example, have a 25-year amortization, you don't need to be right every five years... It has to line up with your comfort level and budget."
According to Mortgage Professionals Canada, about 77% of all mortgages are fixed rate, while the remainder are variable rate (18%), or a combination of fixed and variable rate (5%).
Borrower, know thy self
No one has a crystal ball, and as Steve Jobs famously stated, you can only connect the dots looking backwards. Choosing a fixed or variable rate mortgage is a big decision that needs to reflect your risk tolerance, monthly budget and prediction of where rates may end up in the coming years. Talk to your lender, mortgage broker or financial professional to help you look at different scenarios and crunch the numbers. You'll also find some handy calculators here.