One of the most common questions clients ask me each day is whether to go with a fixed, or variable rate mortgage. The correct answer can vary depending on market conditions, as well as the spread between fixed and variable. As of now, the spread between fixed and variable is closer than it has been in years, and is currently anywhere from 0.15% to 0.20%. This means that variable rates are currently 0.15% – 0.20% lower than the fixed rate options. This isn’t always the case, however, as rates can vary depending on your specific situation. In some situations, variable rates can be as much as 0.20% HIGHER than their fixed rate alternatives!
With such a small spread, it’s hard to justify going variable… however that doesn’t mean variable would be a bad choice, nor does it mean it should be avoided.
Normally, with such a thin spread, I would suggest choosing a fixed rate, just about every time. However, if there was ever a time when an exception could be made on this, it would be now.
The next move from the Bank of Canada will almost certainly be downward, which may occur at some point this year, possibly sooner than later. A drop to prime rate would then widen the gap between fixed and variable… that is, unless fixed rates continue to drop themselves, which is a very likely scenario.
Will prime drop more than once?
I think that is a strong possibility. But this is all speculation. Back in October, there were predictions of 2-3 increases to prime rate in 2019, which will prove wrong. You can see how quickly things can change.
I usually don’t suggest going variable with the intention of converting to fixed mid-term, and I typically advise riding out your variable rate mortgage through the ups and downs during the term.
However, things are a bit different now and this is a strategy that could work. We know our economy is worsening, which will continue to put downward pressure on fixed mortgage rates, as well as prime rate. It’s possible that we could see 5 year fixed rates drop into the mid-2% range by mid-summer. We’ve already seen most 5 year fixed insurable rates dip below 3%, with rates ranging from 2.89% – 3.09% depending on your situation.
One potential strategy is choosing variable, then waiting for fixed rates to drop further before locking into a fixed rate at that time. Not a bad idea, however, there is one problem with this that you’ll want to consider.
You’re trying to time the market.
When converting your variable to a fixed rate you are immediately accepting a higher rate and payment, which is usually the case, and the reason why most people end up waiting until it’s too late. Although, it is ‘possible’ that fixed rates could dip below your variable, which would mean that converting would actually result in a decrease in payment. I don’t believe this has ever happened before. At least, not in my 12 years experience as a broker. This is now a possibility, however.
What most people will do when considering converting their variable rate mortgage into a fixed is they will try to wait until the timing is perfect. The problem is that you would have to be psychic to know for sure. It’s like buying a stock and waiting for the perfect time to sell. Sounds good in theory, but the reality is a different story.
If choosing to use this strategy, you would have to let go of perfection, and understand that it is unlikely that you’ll make the switch at the perfect time. There are many that will continue waiting until it’s too late. This is why you need to be disciplined and detach yourself from getting the timing perfect. If you focus on perfection, you’re only going to stress yourself out and create unnecessary anxiety for yourself. This strategy can work, but it’s definitely not for everyone. Keep in mind also that this would be a strategy based on speculation, so there is added risk, which you would need to be comfortable with.
If using this strategy, you may also want to consider setting your variable rate payment to match that of the 5-year fixed rate you were considering. This way, 100% of the higher payment would go to your principal instead of to interest as it would if you chose fixed. Now you’re getting ahead of the game! Plus, you were prepared to make the higher payment anyway, so why not make that higher payment work for you and not for your bank? This is a great strategy for anyone contemplating fixed or variable.
Keep in mind, you could always convert your variable to a fixed, but you can’t convert your fixed to a variable. So this works in one direction, but not the other.
Everyone is different and many will just want to set their rate and forget about it. Keep in mind that anything can happen and this is all speculation. In the long term, we WILL see rates increase back up to over 4 or 5%. It’s just a matter of when. However, I think we’ll see low rates for at least the next 2-3 years or so.
We had been seeing 5 year fixed rates decrease just about every week since early February, which stopped as soon as we got into April. That doesn’t mean the decreases are over, however. Time will tell.
Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank – How to Win The Mortgage Game in Canada, and has ranked as one of the top 75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on season two of TV’s Top Million Dollar Agent.