As fixed-rate mortgage rate offers drop, those with variable loans who plan to switch and lock in need to consider more than just the rate, experts say.
James Laird, co-founder of Ratehub.ca and president of CanWise, says the rates offered on fixed-rate mortgages in Canada are the lowest ever, so it makes sense to consider your options.
However, he pointed out the benefit of an adjustable rate mortgage if you may need to terminate it before the end of the term, as the penalties imposed on a fixed rate mortgage can be significantly higher.
“Whenever people get a mortgage, especially when they buy a house, they feel very settled in their life, their job, their relationship, their financial situation, everything seems very certain to them. But in time, life happens,” he said.
“Then three years later you think your existing home doesn’t make sense anymore and so a lot more Canadians end up breaking their mortgage than they realize.”
Just as it sounds, a fixed rate mortgage retains a single interest rate for the life of the loan, while with an adjustable rate mortgage, the rate charged varies based on the prime rate.
Changes to the prime rate generally occur when the Bank of Canada changes its policy rate: when it goes up, prime rates go up, and vice versa.
The Bank of Canada cut its key rate earlier this year as part of an effort to stimulate the economy when the COVID-19 pandemic forced millions of Canadians out of work and out of non-essential activities . When this happened, prime rates fell and variable rate loan rates also fell.
Since then, offers for five-year fixed-rate mortgages have also fallen, with rates from some lenders now below 2%.
Wanita Fonseka, vice president of retail member experience at Meridian Credit Union, said a fixed-rate mortgage provides stability and predictability for your payments.
“We’re in a different environment right now with such low rates,” she said, noting that the prime rate is low but will eventually rise when the economy recovers.
“So locking right now at those rates… probably isn’t such a bad move.”
However, Laird notes, those who have already had a variable rate loan for a few years may not be able to find a better fixed rate option.
With the major Canadian banks’ prime rate now at 2.45%, those discounted by half a percentage point or more from prime may find it difficult to find a fixed rate offer better than what they are currently paying.
Like Fonseka, Laird said the Bank of Canada will raise rates at some point in the future and that will drive up the rates charged on variable rate mortgages, but when that will happen is unknown.
“The more optimistic you are about how quickly we’ll recover…the more you should lock yourself into a fixed rate, because when things get back to normal, rates will go up,” he said.
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