Renewals, Locking in and Rates...

Should you lock in?

Deciding whether to switch from a variable to a fixed mortgage depends largely on your term length. Currently, fixed and prime rates are approximately 5% and a bit over 6%, respectively. For a variable rate to be advantageous, you'd need to see a prime rate decrease of over 1% from the Bank of Canada, with even more required to offset the increased payments seen so far. The Bank of Canada is expected to make incremental changes to its rate, typically between 0.25% and 0.5%, with some periods of holding rates steady. These decisions are influenced by economic indicators such as inflation (targeting 2-3%) and stable or decreasing unemployment rates.

In an optimistic scenario, we might see a total reduction in the prime rate of 1% to 1.5% by early 2025. If your mortgage term has a year or less remaining it’s generally advisable to lock in a fixed rate, as you won't benefit much from potential rate reductions. However, if your term is longer than a year, you might benefit from the anticipated rate decreases, potentially achieving a better overall outcome with a variable rate.

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If you have an upcoming renewal 6 months to a year out

The best advice in any scenario is to talk to a mortgage broker. While it may sound cliché and biased, financing should work for you and your specific context. Mortgage brokers can help you lock in rates for a short period, ensuring you benefit from lower rates even if they increase later. Never simply sign a bank’s renewal offer, as it will rarely be the best rate available. Although it may simplify the application process, exploring other options can yield better rates and terms.

If you currently have a low fixed rate and are expecting a significant increase in payments at renewal, consider setting up accelerated or prepayments now. This helps reduce the shock of higher payments by gradually increasing your payment amount and allows more of your payment to go toward the principal. This can result in a lower overall mortgage balance and a slightly lower payment when you renew. Many can expect [fixed] renewal rates in the 5% range.

For variable rate holders, it's a bit of a gamble. Many anticipate that the difference between fixed and prime rates will close and possibly invert next year. This means higher payments [than fixed] for about a year, followed by lower payments. If this trend continues, a variable rate could be beneficial, but it remains uncertain.

We do forecast moderately lower rates in the future, so it might be worth waiting until later in your term. However, keep in mind that lower rates typically increase housing demand and home prices, which could offset any savings from the rates. If you are looking to purchase, now may be the best time.

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Fixed Vs Variable

Deciding between fixed and variable rates isn’t as straightforward as comparing one percentage to another. Historically, variable rates have typically been lower than fixed rates, except for recent post-COVID trends. We expect this norm to return, making variable rates the "better" empirical choice in the near future.

However, the decision depends on more than just rates. If you value certainty and stability, a fixed rate might be the best option. Fixed rate holders have largely avoided the anxiety of fluctuating mortgage payments over the past few years. On the downside, fixed-rate mortgages usually come with higher penalties for breaking the mortgage.

Ultimately, the choice between fixed and variable rates should be based on what works best for you and your family’s financial situation and risk tolerance.

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Notes

Prime/Variable/Adjustable Rates – These terms are often used interchangeably or differently depending on the audience. The ‘Prime’ rate generally refers to a bank's or the Bank of Canada’s lending rate. This rate often includes a ‘discount’ that institutions apply to mortgage products before the client sees it. For example, if the lending rate is 6.95%, a client might actually see a 5.95% rate. Variable and adjustable rates are often confused or overlapped. Adjustable rates may result in an increase to your total payment, while variable rates typically keep your payment the same but allocate less of it toward the principal as rates rise.

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