Optimism about falling rates hasn’t been this high since we were all fighting over toilet paper in March, 2020. You can see it with bond yields diving over one percentage point since October.
The driver is anticipated Bank of Canada rate cuts in 2024. According to CanDeal DNA, the latest bond market outlook implies that the prime rate could dip 2.25 percentage points by 2026, starting around April.
Plunging yields after a big rate hike cycle has historically signalled a good time to float your mortgage rate. The question is, if going variable makes sense, what sort of mortgage should you get?
Lowest fixed and variable mortgage rates in Canada for December 7, 2023
Turns out, there are lots of different flavours. Here’s a menu of variable-rate options to consider.
Term length
The most popular contract length is five years, but you’ll also find three-year terms. The latter is helpful if: (1) you won’t need a mortgage for five years and want to lower the chances of paying a prepayment penalty, (2) you want more flexibility to refinance into a different term before five years, and (3) variable-rate discounts are only so-so, like today.
If you can find a three-year variable for just 10 basis points more than a five-year, for example, that’s a good value for the optionality you get. (A basis point is 1/100th of a percentage point.)
The best term comes from HSBC, a five-year term that lets you out with no penalty after just three years. Sadly, if RBC’s pending takeover of HSBC Canada is approved by our Finance Minister, we may well kiss this sweet product and HSBC’s industry-leading uninsured mortgage rates goodbye.
By the way, the Competition Bureau completely dropped the ball by approving RBC’s shrewd takeover and not looking out for Canadian consumers. But don’t get me started on that.
Payment type
Floating payments may be more popular than ever in 2024. These are mortgage payments that fall when the prime rate falls (aka an “adjustable rate mortgage” or ARM). For folks tight on cash flow, ARMs will give them more budgetary breathing room once the Bank of Canada cuts rates.
The alternative is a traditional variable-rate mortgage (VRM) where the payments don’t budge unless rates soar and you’re not covering all the interest. The Office of the Superintendent of Financial Institutions (OSFI) is trying to discourage banks from offering such mortgages. That’s a mistake, as fixed payments have been the life raft keeping variable-rate borrowers afloat amid the storm of rate hikes.
OSFI argues that forcing people to pay more principal reduces bank risk. But stats show that people with fixed payments don’t default over 99 per cent of the time. Moreover, VRM payments reset at maturity to get borrowers back on track – ensuring they pay off their mortgage in the original contractual amortization period.
In short, fixed payments buy people more time as rates climb – priceless for families trying to weather the cost-of-living tornado.
Conversion
Almost all variable rates let you switch to a fixed rate at anytime. But many lenders restrict what term you can lock into. Some force you to choose only a five-year fixed, which is restrictive. Others let you convert only to a three-year term or longer.
The most flexible lenders allow you to convert into any fixed term, including a one- or two-year fixed. That’s perfect for commitment-phobes who still want a little rate protection.
Compounding
Variable rates are commonly compounded monthly. Some compound semi-annually, however, leaving about $350 more in your pocket per $100,000 borrowed at today’s rates.
HELOCs
Combined loan plans (CLPs) are mortgages with two portions: a regular mortgage and a home equity line of credit (HELOC). If you want the flexibility of a HELOC, note that some lenders don’t offer a discounted variable rate on the mortgage portion.
Another popular feature is readvanceability. That’s where lenders automatically increase your HELOC credit limit as you pay down your mortgage principal. The crème de la crème of CLP lenders not only throw variable-rate discounts your way but also let you convert higher-cost HELOC borrowing to a discounted variable at any time.
Penalties
Most lenders make you pay just a three-month interest penalty if you break a variable-rate mortgage before maturity. However, some lenders charge up to three per cent of the principal or tack on reinvestment fees.
Prepayment options
Lenders commonly let you prepay an extra 10 to 30 per cent of your mortgage amount each year without penalty. Anything above 10 per cent is overkill for most borrowers, but higher limits have value when you expect a cash windfall. Making a large prepayment can also reduce your penalty if you break the mortgage early.
Portability
Only a minority of lenders let you port your existing variable rate to a new property without penalty. Some require you to first lock into a fixed rate to port. Others let you move the mortgage to a new home without penalty, but you lose your variable-rate discount. And the time they give you to port can vary from 30 days to 180. Note: porting requires that you requalify all over again.
Increases
Sometimes, you need more money, like when you take out equity to consolidate debt or move to a new, more expensive home. Some lenders don’t let you increase a variable-rate mortgage without penalty.
Cashback
Some lenders offer up to $5,000 cashback, depending on your mortgage size. If you break the mortgage early, you must pay back some or all of it. But the cash is a bonus if you get a reasonable rate and ride out the mortgage to maturity.
If you’re switching lenders, try to negotiate no switch costs. Typically, you have to pay your existing lender’s assignment or discharge fee to switch. Depending on your province, this fee can range from zero to more than $300.
Qualifications
It’s easier to get approved by some lenders than others. For example, certain providers allow high debt-service ratios, which can help if your debt load is temporarily elevated. Others allow lower credit scores or higher loan amounts. And yet others, like specific credit unions and non-prime lenders, will approve you without having to pass OSFI’s mortgage stress test.
Before talking to a mortgage adviser, decide what features above you can’t live without. It’s like going to a buffet with a game plan. Know what you gotta have on your plate. Then hunt for the lender that won’t leave your wallet starving.
Bond yield bonanza: Falling rates beckon homebuyers
Wednesday’s Bank of Canada statement almost sealed market expectations that rates have peaked. As a result, bond yields and fixed mortgage rates keep falling.
Sinking yields make fixed mortgages cheaper to fund. That’s why lenders have been sharpening their pencils in the last week — a development that could wake up homebuyers after Christmas
In the insured market, the five-year fixed rate is back below 5 per cent for the first time in months. Providers like Radius Financial and Butler Mortgage lead the charge at 4.99 per cent. If mortgages were a limbo dance, these guys would be hard to beat.
Then there’s the uninsured mortgage crowd, looking on with envy. Despite tumbling 18 basis points, the best nationally-advertised fixed is 5.86 per cent from RateHub. This insured-uninsured rate gap is due to rising default concerns and lower funding costs for insured mortgages.
But if you’re well-qualified, risk-tolerant and need financing for three or more years, don’t waste time with fixed rates. Play the odds, ride the wave and float your rate instead.
Rates were sourced from the MortgageLogic.news Canadian Mortgage Rate Survey on Dec. 7, 2023. We include only providers who advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.