More than half of Canadian mortgages are set to renew before the end of 2026. With the Bank of Canada reducing its key interest rate from 5.0% to 4.75% on June 5th, many homeowners are now contemplating whether to choose a fixed or variable rate upon renewal. Understanding the available options and anticipating changes is crucial to effectively managing today's dynamic mortgage landscape.
Current Situation
During the pandemic real estate boom, variable rates were historically lower, but this trend has reversed recently. Currently, the average five-year variable interest rate offered by mortgage lenders is around 6.7%, while fixed rates are typically at 5.6%. Variable mortgage rates depend on various economic factors, including the key overnight lending rate set by the Bank of Canada. Although the central bank recently cut its key rate for the first time in four years, it could change course if inflation rises in the coming months. Economists expect further cuts by the end of 2024, continuing into 2025 unless economic conditions shift significantly. Despite declining rates, the historically low rates of the past two decades are no longer expected.
Considerations for Variable Rates
For variable-rate mortgages, an increase in the prime rate, influenced by the Bank of Canada's overnight lending rate, leads to higher mortgage payments. However, variable loans with fixed-payment options keep monthly payments unchanged, adjusting the mortgage amortization period instead. This results in a smaller proportion of each payment going towards repaying the principal.
Understanding Your Needs
Choosing between a fixed- and variable-rate mortgage depends largely on the borrower's risk tolerance and personal situation. Variable rates fluctuate, so consider if your lifestyle can accommodate these changes. Even if interest rates begin to fall, numerous economic factors influence their direction throughout your mortgage term. The right mortgage product depends on your short- and medium-term situation. If you're in a period of transition (career change, separation, etc.), a fixed rate might offer more stability.
Strategic Options for Borrowers
- Fixed-Rate Mortgage with a Shorter Term: Amid economic uncertainty, many borrowers are opting for shorter-term fixed-rate mortgages (one, two, or three years). This approach allows borrowers to lock in predictable monthly payments without committing to the same rate long-term.
- Hybrid-Rate Mortgage: This option combines features of both variable and fixed rates — part of the mortgage has a fixed interest rate, and the other has a variable rate. This allows borrowers to benefit from both stability and potential rate decreases.
- Convertible Mortgage: This loan allows borrowers to convert a variable interest rate into a fixed-rate mortgage, or vice versa, before maturity. This flexibility helps adapt mortgage strategies to changing market conditions.
Consult a Professional
Ready to navigate your mortgage renewal with confidence? Contact us today! We can connect you with one of our trusted and experienced mortgage professionals who are ready to help you explore your options and find the best solution tailored to your needs. Whether you're considering a fixed or variable rate, they will provide personalized guidance to ensure you make an informed decision.
Source: CBD
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