Variable or fixed – which rate is better?
The possible changes of variable mortgage rates have been widely discussed recently in terms of the central bank’s decisions on its benchmark policy rate.
That rate, affecting variable rates future, remained at 0.25% in the Bank’s latest announcement on January 26, marking one more month of no change since it first went down to that level in March 2020.
Some experts rushed to warn about the prospects for variable rates in 2022, with multiple Bank of Canada rate increases anticipated this year.
Nevertheless, variable rates will probably still be a strong option for both new and existing mortgage clients even despite those future increases.
Many benefits of variable rates may still outweigh the risk associated with rate hikes, especially with the Bank of Canada likely to show a steady hand in its rate decisions in 2022.
Today, one of the best 3-years variable rate is 0.99%, while the best fixed rate is about 2.59%. The BoC has to raise its rate six times in order for you to regret choosing it.
In addition to it, variable rates remain popular as the penalty associated with breaking them is usually much lower than in case of a fixed mortgage.
As a rule, fixed rate penalties are calculated as whichever is larger between the interest rate differential (IRD) or three months of interest. Meanwhile, variable penalties consist only of the latter.
The IRD penalty on fixed rate mortgages can vary from 1% to 8% of a principal balance, with 6 out of 10 Canadians facing that penalty by breaking their five-year mortgages within three to four years.
Imagine that something has changed in your life and now you want to sell your house or refinance. You’ll wish you had the variable rate mortgage, as it offers you freedom to shop around for the best offer, while in case of a fixed rate, your penalty may be so big that you might reconsider your decision or lose tenth of thousands of dollars.
Although borrowers who don’t like risking a rate increase may feel more comfortable with a fixed rate, for some well qualified borrowers variable rate may be still a better option, especially for those who consulted with a mortgage professional and already know the details.
The lowest mortgage rates have been falling since the start of the pandemic, and many mortgage holders considered breaking a mortgage early to get a better rate, but some of them faced a possibility of a large mortgage penalty.
Nevertheless, as short-term fixed rates went up during the previous 12 months, mortgage penalty quotes received by borrowers over the past two years may be not accurate any more. This could make more Canadians reassess if it’s worth breaking their mortgage early.
Please also remember – economy is cyclical and after boom will come a slowdown, so your variable rates will go up and down following Bank of Canada decisions and Prime rate movements.