With the Bank of Canada (BOC) raising its benchmark interest rate 6 times since March it’s no wonder everyone is questioning whether they should lock to a fixed rate or ride the variable train.
What's the difference between fixed and variable rates?
With a fixed-rate mortgage, the mortgage rate and payment you make each month will stay the same for the term of your mortgage. With a variable-rate mortgage, however, the mortgage rate will change with the prime lending rate as set by your lender. A variable rate will be quoted as Prime +/- a specified amount, such as Prime -0.45%. Though the prime lending rate may fluctuate, the relationship to prime will stay constant over your term.
What’s popular? Fixed or Variable?
Fixed mortgage rates are most common; however, people do have variable rates. Fixed rates are also slightly more popular with younger age groups, while older age groups are more likely to opt for variable rates.
Comparing fixed and variable mortgage rates
You can think of the difference, or spread, between variable and fixed mortgage rates as the price of insurance that lending rates will not increase. When interest rates are low and are not expected to fall further, it is generally advised to lock in a fixed rate, as variables rates will, at best, stay the same, or increase. On the other hand, if you expect interest rates to fall with some certainty, then a variable rate is preferred, as you will be able to absorb the benefit of paying lower interest. Similarly, if the difference between the variable rate and the fixed rate is significant, it may not be worth paying the premium for the stability protection of a fixed rate.
Fixed and variable mortgage rate drivers
The Bank of Canada adjusts the prime rate depending on the state of the economy, as determined by economic factors such as unemployment, export and inflation. Together, combinations of unemployment, export, and manufacturing values shape the inflation rate. Generally speaking, when inflation is high, the Bank of Canada will increase the prime rate to make the act of borrowing money more expensive. Conversely, when inflation is low, the Bank of Canada will decrease the prime rate to stimulate the economy and improve the attractiveness of borrowing.
Everyone’s scenario is different so it’s best to speak to your broker/lender about what works best for you. The way I see it there is no wrong or right answer – it all depends on your individual circumstance.
R.
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