While July was supposed to see interest rates jump to a seven-year high, the United States’ recent threats of tariffs against Canada along with a risk of Canada’s EU trade deal falling apart has put a kink into that plan. With Canada’s central bank no longer confident that raising interest rates makes sense, a would-be summer of record hikes has become a season of interest rate ‘ho-humness.’ The strangeness of the year also has some aspiring homebuyers asking another question many thought they would never ask themselves: does it make sense to think about choosing a variable mortgage over a traditional fixed-rate?
What is a variable mortgage?
Unlike a fixed-rate mortgage, a variable mortgage has a fluctuating interest rate that changes as the market interest rate changes. While these mortgages may have a lower interest rate from the beginning of the loan, there is no guarantee these rates will stay below a fixed rate – so it’s a gamble. In many cases, lenders also offer hybrid mortgages (i.e. adjustable rate mortgages) that include both a fixed and variable rate, which can make payments more predictable.
Are variable mortgages a viable option?
As of June 22, the lowest five-year variable rate was only 0.73% lower than a five-year fixed rate. The Globe and Mail reports that even with the gap, Canadian homeowners will, “…need more than four quarter-point Bank of Canada hikes to pay less interest in a five-year fixed [rate].” If this scenario ever unfolded, Canada would nearly be at the bank’s neutral rate (between 2.25-3.50%, respectfully), resulting in interest rates ceasing to increase. Thus, this would invalidate the reason for choosing a variable mortgage purely based on the five-year timeframe in the first place as there would be little-to-no-risk of interest rate hikes getting out of control.
Don’t count out variable mortgages just yet
It still makes sense to consider variable mortgages despite a fixed-rate seemingly looking like the better five-year bargain. For example, if you plan to sell your home early a variable mortgage is the logical option since the penalties for leaving a five-year fixed mortgage is astronomical. Chances are you don’t fall into that outlier, but take a look at your situation for a moment anyway.
If you have a stable job, immaculate credit, manageable debt, a padded savings account for emergencies, and a budget that shows you can handle paying your mortgage, bills, and have enough left over to provide a certain quality of life for yourself (and your family, if applicable), a variable mortgage can still allow you to pay less interest beyond the five-year mark. Absorbing is key, here; if you can handle interest rates that may inflate over the life of your loan, variable mortgages are worth the consideration.
Even if you don’t want to go all the way with variable mortgages, hybrid mortgages are a smart option – especially for homeowners that are unsure if they will be able to easily absorb rising interest rates in the future. Whereas your interest rate will fluctuate, it won’t change as dramatically as with a variable. Consider your financial situation and future before settling on the right interest rate for you; as always, speak with a trusted mortgage agent (me) to appropriately weight your mortgage options.