Is It Time To Switch Your Variable Rate To A Fixed Rate?

Is It Time To Switch Your Variable Rate To A Fixed Rate?

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For the first time since 2018, the Bank of Canada recently hiked the overnight interest rate to curb inflation and cool the real estate market. With increasing interest rates many variable mortgage holders are considering switching to a fixed rate.  

With the 0.25% overnight rate hike, some are now paying approximately 1.60% for their variable rate mortgage. Assuming the Bank of Canada follows through with its plan to hike rates five more times over the next 12 months, the rate would still be under three per cent, which is lower than the current offer on a fixed rate mortgage (as of March 25, 2022 ~ 3.69%) 

Interest rates in the bond market, which are used to price fixed term mortgages, have been moving upwards for almost a year since the Federal government stopped buying bonds to stabilize rates during covid. Six months ago it was easy to get a five year fixed rate for under two percent compared to the current rates.

While a variable mortgage allows you to transition to a fixed rate version at no cost, one should reconsider this for the following reasons:

  1. The time to have locked into a fixed rate was months ago when rates were much lower. Fixed rates are well above their lows, whereas variable rates have just started to increase. The current spread between variable and fixed rate is significant and a variable mortgagee could absorb an additional six or seven more rate hikes of a quarter per cent before reaching the current fixed rate level of 3.69%.   
  2. Many are skeptical the Bank of Canada will follow through with its plan to hike rates five more times by this time next year.
  3. History has shown that central banks usually fall short of their rate hike goals. Variable rates offer more flexibility and lower penalties than fixed rate mortgages. Many borrowers end up breaking their term if they need to refinance or sell.

The penalty for breaking a variable mortgage is typically three months of interest whereas a more punitive calculation is usually used with a fixed rate.

The main reason for switching to a fixed rate is if you experience anxiety every time the Bank of Canada makes an interest rate announcement. For a five-year fixed rate, 3.69% is still low and below current levels of inflation, so if you prefer the peace of mind the fixed option makes sense.

The current rate hike comes at a time when the real estate market is showing signs of slowing Canada wide; but perhaps not here in Alberta. Over the past couple of months, buyers with expiring mortgage pre-approvals have increased demand and homes sales by front running the rate increase. For now, it is still a "sellers'" market, but we are seeing signs of buyer exhaustion.  It wouldn't be surprising if the real estate market in Alberta continues to surge.  To be continued


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