Over half of Canadian mortgages are due for renewal by the end of 2026, and with the Bank of Canada’s key interest rate recently dropping from 5.0% to 4.75%, many homeowners are weighing their mortgage renewal options. Deciding between a fixed or variable rate is a critical choice in the current fluctuating mortgage market.
As homeowners gear up to renegotiate their mortgages in the near future, those with variable-rate mortgages or loans secured during the low rates of 2021 will encounter substantial shifts. The following are essential considerations to guide you in making a well-informed decision for your impending mortgage renewal.
Current Situation
Amid the pandemic, variable rates were significantly lower, yet this trend has changed. Presently, the average five-year variable interest rate is around 6.7%, while fixed rates are approximately 5.6%.
Variable mortgage rates are largely affected by economic conditions, especially the Bank of Canada’s prime overnight lending rate. Although there has been a recent decrease in this rate, the possibility of future hikes due to inflation persists. Nonetheless, economists anticipate further reductions in the rate by the end of 2024, extending into 2025, barring any substantial economic upheavals. Despite these potential decreases, the exceptionally low rates seen in the last two decades may not reappear.
Understanding Variable Rates
Variable-rate mortgages adjust with changes in the prime rate, which is affected by the Bank of Canada’s overnight rate. This means that if the prime rate rises, so do your mortgage payments.
Some variable-rate mortgages offer fixed-payment options, where the monthly payment remains constant despite rate changes. Instead, the mortgage amortization period adjusts, affecting how much of each payment goes towards the principal.
Assessing Your Needs
Choosing between a fixed and variable rate depends on your risk tolerance and personal circumstances. Variable rates can fluctuate, so consider whether your lifestyle can accommodate these changes. Even with potential interest rate drops, various economic factors can influence rates during your mortgage term.
Your decision should align with your short- and medium-term plans. For example, if you’re experiencing a significant life change (e.g., career shift or separation), a fixed-rate mortgage might provide the stability you need.
Strategic Options for Borrowers
- Fixed-Rate Mortgage with a Shorter Term: In times of economic uncertainty, shorter-term fixed-rate mortgages (one to three years) allow borrowers to lock in predictable payments without long-term commitments.
- Hybrid-Rate Mortgage: Combining features of both fixed and variable rates, a hybrid mortgage offers a mix of fixed and variable interest rates, allowing borrowers to leverage the benefits of both.
- Convertible Mortgage: This flexible option allows borrowers to convert a variable-rate loan into a fixed-rate mortgage (or vice versa) before maturity, adapting to market conditions.
Consult a Professional
Given the current high real estate prices, selecting the right mortgage product is essential. Consulting a mortgage broker can help you explore options tailored to your situation. By anticipating interest rate fluctuations and adjusting your financial strategy, you can better manage your long-term mortgage commitments.