A housing development in Cranberry Township, Pa., March 29. While it was possible in the past to get your lender’s prime lending rate minus one percentage point or more on a variable-rate mortgage, today’s discounts are smaller.Gene J. Puskar/The Associated Press
Your mortgage lender would love you to take a fixed-rate mortgage right now.
Variable-rate mortgages are such a bummer if you’re a lender. With interest rates that track Bank of Canada rate changes, a variable-rate mortgage can be expected to cost steadily less for a borrower in the months ahead. That means an unpredictable, reduced flow of interest revenue for the lender.
Lenders prefer certainty in their business and, really, who doesn’t? A lot of borrowers are justifiably going with fixed rates for the sense of calm they get from not having to concern themselves about the economy and interest rates until renewal.
We had an inflationary surge that drove up interest rates, and now rates are falling as the economy weakens. On Wednesday, the Bank of Canada is expected to chop its overnight rate by half a percentage point rather than the more common quarter-point.
Will we have a recession in the year ahead, a soft landing or something unforeseen like resurgence of inflation? Borrowers can insulate themselves from this uncertainty by locking in a mortgage rate for three or five years, today’s popular fixed terms.
But while fixed mortgage costs are down nicely from peak levels, they’re nobody’s idea of a great rate. A potential workaround is to take a variable-rate mortgage now and then convert it to a fixed-rate loan after fixed rates move lower.
“You’re parking yourself,” said Tuli Parubets, a Toronto-based mortgage broker and believer in the strategy of going variable and planning to lock in later. “It’s a temporary placement.”
Ms. Parubets said she has noticed that lenders are keen to get people into fixed-rate mortgages today, and cited the so-so discounting offered on variable rates as evidence. While it was possible in the past to get your lender’s prime lending rate minus one percentage point or more, today’s discounts are smaller.
This gives us variable-rate mortgages in the rough area of 5.7 per cent, compared with three- and five-year fixed mortgages in the mid-4-per-cent zone. Now you see why fixed-rate mortgages remain popular.
“There’s still a large difference between fixed and variable and I find most people prefer to have immediate savings/lower payment upfront versus waiting for rates to drop,” Victor Tran, a mortgage agent with TMG The Mortgage Group, said in an e-mail.
Variable-rate mortgages may also be suffering from PR issues related to the way they left homeowners exposed when interest rates soared a couple of years ago. But with inflation receding, these are different times.
After the Bank of Canada rate setting this week, there are three more opportunities for rate cuts before the end of the first quarter of 2025. A sample forecast of where we’ll be in a few months: CIBC Economics sees an overnight rate of 2.75 per cent by March, 2025, down considerably from 4.25 per cent at the beginning of this week.
As my colleague Salmaan Farooqui reported last week, there doesn’t seem to be a ton of room for fixed-rate mortgages to fall just now. But mortgage rate watchers think we can get below 4 per cent in the months ahead. The more the Canadian and U.S. economies slow, the lower fixed rates can get.
Meantime, there’s no getting around the fact that, for now, a variable-rate mortgage will cost you more than a fixed-rate mortgage. But Ms. Parubets’s perspective is that you’re temporarily spending a few hundred more dollars a month to save thousands of dollars over the longer term by getting a better fixed rate than you could today.
A big consideration if you go variable and plan to switch to a fixed rate is your lender’s terms for locking in. Ms. Parubets said you should be able to move into a five-year fixed-rate mortgage with no issues, but some lenders may restrict you on shorter terms. The conversion to fixed from variable should be cost-free in the vast majority of cases.
She pointed out that if you don’t like the deal offered when you lock in, you can find another lender. Also, variable-rate mortgages can usually be broken at a cost of three months’ interest, which is generally a lot cheaper than the same for fixed-rate ones.
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