One of the most common questions we get from our clients is whether they should be choosing a fixed or variable rate mortgage. With all the talk about rising rates, it can be enough to scare anyone into locking into the certainty of a fixed rate. I’m hearing more and more people telling me that they’re being advised to go fixed to protect themselves against rising rates.

But who are the ones doing the advising? 

When it comes to mortgages, everyone seems to think they are an expert. Your parents, your brother, your sister, your aunt, your uncle, your cousins, your friends, your barber, your massage therapist, your Uber driver, and even the guy behind you in the checkout line at Sobeys. 

Everyone thinks they’re an expert and everyone has an opinion on it.

They all mean well, but when people try to advise on financial matters, they can only base it on their own thoughts, feelings, financial situation, and tolerance for risk.

Just because something might be right for them, doesn’t necessarily make it right for you.

I don’t believe in one size fits all mortgage advice, which is why we tailor the advice we give our clients based on their specific situation. We might recommend variable to one client, but then recommend fixed to another five minutes later. Everyone is unique in their own way, so mortgage advice should be provided accordingly.

 

Rates Will Increase

Yes, the Bank of Canada will be increasing their rate multiple times this year. That is no big secret. Strong economic conditions, a solid job market, and inflationary pressures leave them no choice. We knew this was coming all along. After all, we can’t expect them to hold their pandemic driven low rate forever.

Rising rates can sound scary, and can lead to even the most die-hard of variable rate mortgage advocates to reconsider their choice.

But are fixed mortgage rates now the way to go?

As I’ve been saying for years, there is no right or wrong answer on fixed vs. variable, which is why you’ll never hear me make a blanket statement such as ‘go variable’ or go fixed’. Everyone is different in their own way.

 

Odds Are In Favour Of Variable Rates

Over the past 40+ years, variable rate mortgages have won over fixed more than 80% of the time. The odds are in favour of variable by far, but past performance doesn’t necessarily equal future performance.

The Bank of Canada had been predicting that their first increase would come in the middle two quarters of 2022.

But predictions are exactly that. 

Predictions. 

They can and do change.

 

Why The Bank of Canada Held Their Rate Steady

In the summer of 2020, the BOC wasn’t expecting to increase their rate until 2023. As with anyone making a prediction, they can only base it based on what they know at that time.

So what made them change their path?

In early January, the US Federal Reserve announced that they would be increasing their rate sooner than expected. This resulted in bond yields spiking upward, which then forced mortgage lenders to increase their fixed rates by as much as 0.25% across the board.

Many started to believe that the Bank of Canada would increase their rate on January 26th, which was their first scheduled rate announcement of the year. This became the popular belief, with economists predicting a 70% chance of an increase on that date.

I’ve been saying all along that I would be surprised if we saw an increase in January, as a move this early didn’t make sense to me.

But why was I skeptical?  

 

  1. Follow The Leader – Canada will typically follow the US. Even though they announced their plans to increase sooner than originally thought, their increase is not expected until March. Canada historically doesn’t make moves before the US. 
  2. Market Uncertainty – I also couldn’t see the BOC increasing their rate given the uncertainty created by the Omicron variant, not to mention, we were still in the middle of a lockdown.

 

As I was expecting, and contrary to popular belief, the Bank of Canada held their rate as per their January 26th announcement.

 

The Next Bank of Canada Rate Announcement  
The next scheduled rate announcement from the Bank of Canada is on March 2nd, which we’ll be watching closely. The odds of a rate increase are elevated further, and a 0.25% rate hike is definitely on the table. The question is whether they will increase their rate on March 2nd, or if they decide to hold off until their following announcement on April 13th.  No one knows at this stage, not even the Bank of Canada.

Rate increases are certain. It’s just a matter of when they begin, and how frequently they come thereafter.

 

Does This Mean Everyone Should Be Going Fixed? 
It all comes down to your tolerance for risk. What is right for one person doesn’t mean it’s right for another.

Here are a few good questions to ask yourself before making your final decision on fixed or variable:  

  • How will you feel when the rate increases, and additional increases follow?
  • Do you become flushed with anxiety every time you hear about rate increases on the news?
  • Does the thought of increasing rates scare you?   
  • Will you be asking if you should convert your variable into a fixed as soon as the rate starts to increase?  

If your answer is yes to any of these questions, then a fixed rate might be a better choice from the beginning. Variable rates usually outperform fixed from a cost saving approach, but that doesn’t automatically make them right for everyone.

The best choice is not always the one that saves you the most money. It’s the one that allows you to sleep soundly at night.  

 

Should You Consider a Fixed Rate Mortgage?

Fixed mortgage rates have increased by a full 1.00% or even more since late September. Remember, the reason why they were so low to begin with was due to the pandemic. Just as the pandemic wasn’t expected to last, neither were the insanely low mortgage rates.

Even though we’ve likely seen the last of the sub-2.00% fixed rates, they are still low by historical standards. A fixed mortgage rate can be a great choice if it gives you some peace of mind.  

Five year fixed rates range from 2.39% to 2.79%, and everywhere in between. Major banks are even higher and have now crossed over the 3% barrier for the first time since early 2020.

Variable rate mortgages currently range from 0.90% (prime -1.55%) to 1.35% (prime -1.10%) in most cases. Mortgage rates will vary depending on your situation, which I explain in detail in my blog on Why Different People are Quoted Different Rates 

 

Conclusion

The choice between fixed and variable is not always easy, especially when we hear so much talk about rising rates. There is no right or wrong answer. The best decision will always be the one that feels right to you, which might be different than what your friends or parents are advising.

It’s your mortgage, which is a huge financial decision, so you need to do what you think is best for you.

We’re always here to help guide you through the process from beginning to end, which includes advice on the most suitable options for your specific situation. There is a lot more to a mortgage than just rates.