Everybody Loves Variable Mortgages, Until the First BOC Rate Hike.jpg

Variable Rates, Call or Fold?

Borrowers’ confidence in variable/adjustable-rate mortgages will be a conversation they’ll likely have with their broker, as the Bank of Canada’s overnight target rate begins its climb upwards, maybe as early as this week.

Brokers come across this question: “Should we make the switch to a fixed rate?”

A genuine concern for homeowners and one many brokers have had to answer.

The day-old question of ‘fixed or variable’ borrowers have had to choose when entering a mortgage is now under the spotlight, given the inevitable rate hikes to combat inflation. Even variable rate enthusiasts are keeping an eye on, if not now, then when to make a move. 

But this should not come as a surprise, after years of falling and historically low rates. Choosing a variable rate mortgage means there will be fluctuations from time to time, and we are now approaching one of those fluctuations.

Why pick a fixed-rate mortgage?

A fixed-rate mortgage is great for those who are averse to rate increases. There is no guarantee where rates will go, and given a 5-year term, some homeowners prefer the peace of mind by fixing the mortgage rate. 

Why stick to a variable-rate mortgage?

Several prominent brokers make a solid argument for why clients ought to stay the course, that with the spread between variable and fixed rates being so big, you can absorb several rate hikes before paying more than a fixed rate.

Look at this example using today’s market rates. Let’s assume a 50 basis point increase each year. The variable rate still outperforms the fixed.

Fixed vs variable
$275,0000 Mortgage Balance, Amortized over 25 years.

 

Keep in mind there is no law specifying that rates are restricted to 25 basis point increases at a time. They could be smaller or larger but historically have changed in that increment.

Plus, when choosing a variable rate, there were other influential factors. If you ever need to break your mortgage, the prepayment charge on a variable (generally three months’ interest) is a lot less than you on a lot of fixed-rate.

Reputable mortgage broker Dave Larock of Integrated Mortgage Planners offers this to those who are considering variable rates:

  • Commit to your strategy. Converting mid-term will almost always result in a higher fixed rate than is available today.
  • Set your payments as if you had taken a fixed rate. This will absorb the impact of several short-term rate bumps.

The Verdict

We cannot say that one rate option is definitively superior to the other. Each homeowner’s circumstances, goals, finances, and conditions are unique. As mortgage brokers, our role is to advise, and the choice is ultimately yours to make, but hopefully, we can provide an educated opinion and all of the facts. 

Ian Clark

Ian Clark is a graduate of The College of The North Atlantic's School of Business and is a Mortgage Broker with East Coast Mortgage Brokers. Prior to ECMB, Ian was brokering with Mortgage Alliance Provincial Mortgage Group. Ian is also an active member of Mortgage Professionals Canada, Canadian Mortgage Brokers Association, Canadian Progress Club and the Mount Pearl Paradise Chamber of Commerce.