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  • Writer's pictureJose Gustavo Salcedo

Variable or Short-Term Fixed Mortgage? Decoding the ‘Sweet Spot’ in Canada’s Mortgage Market

Variable or Short-Term Fixed Mortgage? Decoding the ‘Sweet Spot’ in Canada’s Mortgage Market

As the Canadian mortgage landscape experiences rate adjustments in anticipation of the spring market, many are left wondering: is it the right time for a variable or short-term fixed mortgage? Experts are weighing in on the debate, shedding light on the current environment and offering insights for prospective homebuyers and refinancers.

The Current Mortgage Landscape

Despite the absence of clear signals from the Bank of Canada regarding imminent interest rate cuts, some mortgage rates are already showing a decline. According to experts interviewed by Global News, variable-rate mortgages, though currently more expensive, are worth considering in the current market for those comfortable with a bit more risk.

James Laird, co-CEO of, points out that the present mortgage market is more favorable than last fall when rates peaked. Fixed mortgage rates have dipped, with some three- or five-year terms carrying rates of less than five percent. Ratehub's aggregated list of rates indicates that homebuyers can secure an insured five-year mortgage rate as low as 4.79 percent.

Fixed mortgage rates are closely tied to Canada's bond market, influenced by market expectations for Bank of Canada interest rate cuts. Despite the optimism surrounding potential rate cuts later in the year, Bank of Canada officials remain cautious about the pace of decline.

Understanding Fixed vs. Variable

For those contemplating between a variable mortgage with floating payments or a fixed rate, Eitan Pinsky, a Vancouver-based mortgage expert, suggests considering a few crucial factors. Presently, variable-rate mortgages are the more expensive option, hovering around 6.1-6.5 percent.

Pinsky emphasizes that the decision hinges on whether the Bank of Canada is likely to lower its policy rate sufficiently for the variable rate to become more cost-effective than fixed rates over the term. According to his calculations, a two-percentage-point drop over the next three years would make a variable-rate mortgage financially advantageous.

However, Pinsky underscores the importance of the Bank of Canada bringing its rate down to 3.0 percent by 2027 for this scenario to unfold. While plausible, he acknowledges the inherent inflationary risks that could impact the central bank's rate trajectory.

Lingering Risks and the Three-Year Fixed Option

James Laird supports the idea that it's a good time to consider a variable-rate mortgage, given the slim odds of another interest rate hike from the Bank of Canada in the current cycle. However, he acknowledges that opting for a variable mortgage remains a riskier proposition compared to fixed.

Unforeseen world events, such as geopolitical tensions impacting inflation, could disrupt current forecasts for the Bank of Canada's interest rate cycle. Laird advises Canadians banking on rate cuts to maintain financial flexibility and buffer in their budget for potential payment fluctuations.

While some homeowners opt for the five-year fixed-rate mortgage, considered the cheapest option, Pinsky notes a trend where clients are leaning towards a three-year fixed rate. Offering a slightly higher rate than the five-year option, the three-year fixed mortgage provides the promise of an earlier renewal when borrowing costs might be even lower.

Considerations Beyond Monthly Payments

Beyond the monthly payment aspect, experts emphasize other factors in choosing between fixed and variable mortgages. Homeowners anticipating selling or breaking their mortgage might find variable rates more appealing due to lower penalties for breaking compared to fixed mortgages.

Breaking a variable-rate mortgage typically incurs a cost equivalent to three months' interest payments, while fixed-rate penalties can be more substantial, depending on the time left on the mortgage term. Pinsky recommends shorter-term fixed rates for those considering breaking their mortgage in the coming years, as penalties can be more significant with longer terms.

For homeowners with variable rates, the option to lock into a fixed product at any point without a fee provides flexibility and an exit strategy from potential rate fluctuations.

Ultimately, while the mortgage decision hinges on financial considerations, risk tolerance, and lifestyle factors, experts agree that the three-year fixed mortgage might be the 'sweet spot' in the current market. It strikes a balance between cost-effectiveness and flexibility, offering a viable option for those navigating Canada's evolving mortgage landscape.

Source From: Wealth Professional
Adapted by Jose Gustavo


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