Fixed vs Variable Rates
Written by the The Calgary Mortgages .CA Crew
Should you go with a fixed rate or a variable rate?
As if deciding to have a fixed rate or a variable rate on your mortgage loan is not stressful already, let’s add a pandemic into the mix, which only makes this decision more complicated for Calgary homebuyers.
Before we dive into that subject, we will explain the difference between a fixed rate and a variable rate:
Fixed interest rates stay the same during the entirety of your loan’s terms. This means, the cost of the amount that you borrowed, stays consistent throughout the entire term of your loan and it will not change when there are fluctuations within the housing market. Fixed rates move in relation to the long term bond markets in Canada.
Fixed and Variable Mortgage 101
Variable: also known as “floating” rates; change over time in response to fluctuations with “bank prime.” Bank Prime changes based on the changes with the government of Canada overnight lending rates. Variable rates trade at a “discount” to bank prime.
Variable rates, in general, tend to have lower rates than fixed. This is because they are a riskier choice for borrowers. If you do decide to go with a variable rate, you should be aware of the possibility of raised costs. However, if you are financially able to take that risk, and if you plan on paying off your loan quickly, then a variable rate could be a good choice for you.
At the end of 2019, variable rates were a very desire able option for borrowers, because for most qualified borrowers, the rate was as low as Prime – 1.2%. This meant that variable rates were around 2.5%-3% and fixed rate were around 3.5%.
In early 2020, at the beginning of the COVID 19 Pandemic and our global lock down, a lot of rapid changes started happening in the mortgage market.
In March of 2020 when the Canadian and Provincial governments decided to lock down much of our country, the Bank of Canada took drastic action and decreased the overnight lending rate dramatically in 2 weeks. All major Canadian Banks and mortgage lenders followed suit and decreased their Bank Prime rates from 3.95% to 2.45%. As a result, everyone in Canada with a Variable rate mortgage saw about a 50% decrease in their cost of borrowing, nearly overnight!
As a result of the decrease in the Bank Prime rates, bank started slashing their variable rates and selling them only at Prime -0.30% to Prime – 0.50%.
Simultaneously, fixed mortgage rates started decreasing rapidly from the 3% mark to the 1.5% mark that we see today.
Current Mortgage Interest Rates
Just in recent weeks, January of 2021, we have started to see variable rates return to their previous discounts to prime. Some of the major monoline lenders in Canada are now offering Prime – 1.00% variable rate mortgages. But the question begs, is it worth it to take the risk on a variable rate mortgage when you can lock in a 5 year fixed mortgage at the same rate?
The Bank of Canada’s overnight rate is presently sitting at 0.25%. This means that one more “reduction” in the overnight lending rate would put it to zero. Canada has never seen negative interest rates, so it is unlikely that we’ll see the overnight lending rate dip below current levels. This means that the overall benefit of a variable rate mortgage may not exist in today’s Mortgage Market.
With 5 year variable rates and 5 year fixed rates both sitting around 1.5%, an increasing number of customers are choosing fixed rate mortgages.
Should you choose a variable or Fixed mortgage?
If you are unsure whether to take a fixed rate or a variable rate mortgage when shopping for a mortgage loan, connect with your mortgage broker to help you understand these rates & options specifically as they relate to your unique situation.
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