Edmonton Mortgage Blog
Your Edmonton Mortgage Broker: Natalie Wellings
Variable versus fixed!
May 19, 2022 | Posted by: Natalie Wellings
If you have recently gotten pre-approved to get a new mortgage, or received a renewal notice from your current mortgage lender, you are likely experiencing some sticker shock. Yes, rates are higher now, which sucks
I have had a lot more clients choosing to go variable these days with the hope that these high rates don't last too long and that rates come down, eventually
Currently (May 2022), on an insured mortgage (less than 20% down), a lot of lenders are offering Prime -0.90% on a variable rate mortgage. The terms are typically 5 years long. This means that, for 5 years, you will pay whatever the prime interest rate is, less 0.90%. The prime rate is currently 3.20% so that would mean you’d have a rate of 2.30%, today
Who sets the prime rate? The prime rate is set by the Bank of Canada which makes an interest rate announcement, eight times a year, on pre-scheduled dates. The dates are published at the beginning of the year so you will know when to expect an interest rate announcement. You can see the schedule HERE:
Clients often ask me if the Bank of Canada announcements affect fixed-rate mortgages and the answer is no; fixed-rate mortgage rates are based on the 5-year bond yields. You can view the history of the 5-year bond yields HERE: https://ycharts.com/indicators/canada_5_year_benchmark_bond_yield
One thing to keep in mind; just because the Bank of Canada has a scheduled interest rate announcement, doesn’t necessarily mean that they will change the rate. It only means that they will announce whether it will stay the same, increase, or decrease. Prior to the pandemic, we had several years with absolutely no change to the prime rate at all. Conversely, when the pandemic began, the Bank of Canada slashed the prime rate. Lately it has been increasing but the current prime rate is still below pre-pandemic levels. The next rate scheduled rate announcement, on June 1st, is rumored to announce a 0.50% increase to the prime rate. You can view the history of the prime rate HERE: https://ycharts.com/indicators/canada_prime_rate
If you were to choose a variable rate today it would be important to keep in mind that the prime rate is expected to go up, but we don’t know how long it will be higher or how high it will go.
One nice feature of a variable rate mortgage is that you usually have the option of converting to a fixed rate mortgage at any time within your term so you could keep your eye on rates and lock into a fixed-rate mortgage if rates do come down, eventually. My hope is that these higher rates only last 1-2 years and we eventually, go back to lower 5-year fixed terms. If that happens, you could contact your lender and request a conversion to a fixed rate mortgage
The other nice feature of a variable rate mortgage is that, if you ever needed to pay the mortgage off within your term, the penalty is a simple three-month interest penalty. I really like the flexibility that offers, especially if you own a property that you might sell in the near term
The big, potential con of a variable rate mortgage is that there is no cap in the prime rate and you don’t know how high it will go. So, that is a definite risk that you’d have to weigh
The decision to go variable or fixed can be tough right now but I am happy to help you weigh your options. Feel free to give me a call. :)
