Variable Rates or Fixed Term? Choice Getting Harder for Canadians

It wasn’t that long ago that the choice was clear: interest rates are low, and they’re going to stay low, so get a variable rate mortgage because it’s going to be cheaper than a fixed rate. But now, the choice isn’t as clear. Discounts are getting so high on fixed rate mortgages that lenders need to be able to make up for some of that money somewhere. And the only logical place is in the variable rate.
It really is just a balancing act that has affected the reduction of discounts in variable rates. Short-term money in the bond market is now at a premium price, which forces banks to lower the amount of discounts they offer on their short-term loans. While mortgage lenders could traditionally rely on the Bank of Canada to raise the prime, that is no longer an option after the US Federal Reserve vowed not to raise interest rates for another two years. Still, the money has to come from somewhere and so, the only real answer is in the variable rate.
None of this news means that those who currently hold a variable rate mortgage need to run out and lock it into a fixed term deal. And it doesn’t mean that if you’re just applying for a mortgage that you should automatically choose a fixed term rate just because the rates are as low as they currently are. The fact remains that the rate is still very low, even when it comes to variable rate mortgages. And the fact still remains that those rates are not likely to increase at any time.
It all still comes down to whether you want to face the risk of a potential rising rate or not. If you’re renewing or refinancing your mortgage, or getting one for the very first time, the chances are good that you will still get the best deal by going with a variable rate mortgage. But if you don’t want to face any risk and you want the reassurance that the price you pay today will still be the price you’ll pay in 5 years, now is definitely the time to lock in.
Nothing has changed in that sense. What has changed is that, while two weeks ago variable rate mortgages were the obvious choice when it came to picking out your mortgage, the choice is not as clear today. And the small gap between the two rates has many Canadians facing some very tough decisions.