The Fixed vs. Variable Conundrum
Mortgage renewal decisions have always presented borrowers with a challenging choice - to go fixed or variable. However, with interest rates currently at levels rarely seen in decades, the stakes are higher than ever.
The Variable Rate Mortgage's Roller Coaster
Variable-rate mortgages lost their charm as the Bank of Canada's relentless interest rate hikes caused loans tied to the big banks' prime rates to surge. But now, with increasing belief that the prime rate may have reached its peak, the variable rate option has regained favor among borrowers.
Why Some Borrowers Are Considering Variable Rates
- Anticipated Rate Drops: Many experts, brokers, and borrowers believe that interest rates are on the verge of declining. Some borrowers are considering variable rates with the hope that rates will decrease further, after which they can opt for longer-term fixed rates
- Lower Penalties: Variable-rate mortgages typically come with less onerous penalties compared to fixed-rate options if borrowers need to exit the loan early.
- Historical Cost Benefits: Until recently, new variable-rate mortgages usually had slightly lower costs compared to fixed-rate offerings.
Rates Comparison and Bank of Canada's Role
Rates for five-year variable are now often higher than their fixed-rate counterparts. This shift implies that in order to save money over a five-year term, banks may need to reduce their prime rates for variable-rate borrowers. Consequently, future interest rate changes by the Bank of Canada are crucial for those deciding between fixed and variable rates.
Switching from Variable to Fixed
Variable-rate mortgages can be converted to fixed-rate loans without penalties, but borrowers are typically locked into the lender's posted rate. Negotiating fixed rates with the lender or switching to a different lender may incur penalties. While fixed-rate options offer stability in monthly payments, it's essential to note that current rates are among the highest in recent history.
Finding the Right Fit
When it comes to mortgage renewal, we recommend starting by assessing your budget. Using an online calculator to determine the mortgage payment you might face based on your real-life expenses.
While there's been a resurgence of fixed-rate mortgages, many borrowers are now opting for shorter-term options, adopting a wait-and-see approach to future interest rate movements.
Ultimately, the right choice for your mortgage renewal depends on your individual circumstances, including your stage of life, home, and financial goals.
At Valueland Mortgages, we're here to assist you in navigating the complex landscape of mortgage renewals. If you have any questions or require guidance on your mortgage renewal, don't hesitate to reach out.