Whether you have a mortgage, work with mortgages or are thinking about a mortgage, rising interest rates have become an increasingly big concern.
The Bank of Canada raised its key policy interest rate by 0.50 per cent in April 2022 to 1%, following a 0.25 per cent hike in March – which marked the first time the central bank had raised rates since 2018. This 50bps increase was the first of this magnitude since 2000.
The rate increases conjured up questions for many about variable rate mortgages and whether or not they remain a good option, given that rates only seemed poised to continue climbing.
Fixed versus variable
Yet most experts say that a variable rate mortgage is still the way to go for both flexibility and savings. Recent variable rates were sitting as low as 1.5 per cent, while fixed rates are anywhere from three to 3.5 per cent. Canada’s prime rate was 2.7% at the time of writing (before the April increase, which then brought it up to 3.2%).
“The rate would have to increase (several) more times (by 0.25 per cent) to even reach the level the central rate was at before the pandemic,” says Jeff Sparrow, mortgage specialist at Castle Mortgage Group in Winnipeg, Man.
When economic activity ground to a halt in March 2020, the Bank of Canada dropped its rate by 1.5 per cent, from 1.75 per cent to an almost rock bottom 0.25 per cent. As a result, the prime rate, on which variable rates are based, dropped from 3.95 per cent to 2.45 per cent.
“In some cases, the savings equaled hundreds of dollars a month,” says Sparrow. “But these same people may be nervous because of the recent changes, which only increased their payments by, say, $30 a month, so I try to explain the rate changes and let them know what it all really means for them.”
While he is a proponent of variable rates and the savings they offer his clients, Sparrow cautions they’re not right for everyone. For those stressed by increasing rates and payments – and those who don’t have the risk tolerance to ride the wave – experts say that fixed is certainly an option.
“I always note that this is not cookie cutter,” he says. “Everyone’s tolerance for risk is different.”
A middle ground?
There may be products or ways to provide peace of mind while still accessing lower variable rates. The first way is to set your mortgage payments at the level you would be paying if you chose a fixed rate, but to do so under a variable rate.
For example, if you know you’re going to be paying $4,000 per month at a fixed rate, then set your variable mortgage payment for $4,000 a month even if you’re only required to pay $3,500.
That way you’re putting down more on your principal and “all these rate changes on the way up don’t affect you at all,” Sparrow says.
There are also products called blended mortgages, or a blend-and-extend, which allows fixed mortgage holders to combine their current mortgage rate with a new one. To do this, the holder needs to extend the term of the mortgage, but it allows them to access a rate that is somewhere between the old fixed rate and the current rate, without breaking the mortgage agreement or incurring any penalties.
Sabeena Bubber, senior mortgage professional for Xeva Mortgage in North Vancouver, B.C., has always held a variable mortgage and she often recommends them for her clients – both because of the savings and because life is variable, not fixed.
“I tend to recommend to my clients to stick with variable because they do have a higher probability of breaking that mortgage before the term is up,” says Bubber.
Indeed, with fixed mortgages the holder usually signs on for a fixed rate for the duration of the mortgage, which is generally five years. But if they break that mortgage for any reason – moving, divorce (selling to divide assets), or other financial reasons – then there can be steep penalties that come along with breaking that mortgage.
“Look at the pandemic, for example, people were living in homes and perfectly fine,” continues Bubber. “But now a lot of people have to work at home and they need bigger spaces. They’ve been moving to rural areas because they can now work from home and they don’t have to be in the bigger centres.
“Those people who thought that they were going to be in their homes for five years, this significant event happened and now they’re breaking their mortgages.”