Variable vs. Fixed Rate Mortgages? How do you choose?

As fixed rate mortgages increase in price, we often see the “variable rate” differentials increase. This means that for a variable rate mortgage, (which is calculated based off of bank prime), the rates are actually getting cheaper.

So fixed rates are going up, and variable rates are getting cheaper…hummmmm…is this a trick? It’s easy to think that it is! Traditionally, Canadians with variable rate mortgages have paid NET less interest that Canadians with fixed rate mortgages. Check out the graph below.

Source for graph: Ratehub.ca

Over the last 4 weeks, fixed rate mortgages have increased. These increases are primarily driven by the increase in the Government of Canada Bond Yields. It’s a daisy chain, the US Treasury Bonds take off, the Government of Canada Bonds take off, and then fixed rate mortgage rates increase. Fixed rate mortgages have increased from approximately 1.50% to 2.29%. It is substantial!

On the other hand, we’ve seen the “differential to prime” move from -0.70% to -1.10%. This means that variable rate mortgages are currently selling for 1.35%.

Variable rate mortgages aren’t for everyone. Your payments can change, and you need to be prepared for this. But, with your discount to prime sitting at MINUS 1.10% the Bank of Canada would have to raise the over night lending rate 3 times for your rate to increase to where fixed rates are today.

With a difference of almost 1% between fixed and variable rate options, we personally think that a variable rate mortgage could be a great option in todays market place.

Another advantage of a variable rate mortgage is the limited payout penalty. The payout on any variable rate mortgage is just 3 months interest. The payout on fixed rate mortgages can be 10 times higher than that.

Food for thought! Always consult with a mortgage broker to figure out exactly what rates would work best for your personal situation!