As the Canadian economy moves into a post-Covid world, one thing that has become obvious is an increase in day-to-day costs due to the pandemic; everything from gas, groceries, and transportation has seen real increases over the last 12 months.

This includes an increase to 5-year fixed mortgage rates, which are currently averaging in the mid to high 2% range with many lenders. 

One of the most frequent questions I have been getting due to these changes is whether clients should go fixed or variable for their mortgage. For many clients, a variable rate mortgage is still the best choice, but the decision comes down to two factors:

1.Do you anticipate needing to change your mortgage during the term (due to a property sale or refinance)?

2. What is your risk tolerance?

If the expectation is to stay in the property short-term, you should consider a variable mortgage- it provides the flexibility to get out of the property and mortgage at little or no cost. If you feel that you may need to refinance, pull funds out or make changes to your overall mortgage, then again, a more flexible solution like a variable rate mortgage makes more sense. I have seen a considerable rise in refinances in 2021, with clients looking to get into lower rate options or pulling out funds to renovate their homes as many Canadians spend more time at home.

Another concern is your risk tolerance. If you absolutely can’t sleep at night with the thought that your mortgage rate could change or you need your payments to remain stable, then a fixed solution is the more attractive option. 

However, both concerns can be managed, to some extent, with a variable rate mortgage.

Managing Mortgage Changes

Did you know? Most Canadians end up breaking their mortgage every 3.5 years, and in the last 12 months alone, I have seen quite a few clients breaking their fixed-rate mortgages to make changes to their current structure (primarily to improve their rate or to refinance). 

Many clients who broke their fixed-rate mortgage ended up paying tens of thousands of dollars in fees and penalties. A variable rate mortgage might have allowed for either no cost for the changes or a much more minor three-month interest penalty.

With a $500,000 mortgage balance, you might be looking at a $15,000 penalty with a fixed mortgage but only $1,900 with a variable rate mortgage. It is one of the factors that most people overlook as they focus too much on the rate and not on a custom mortgage solution for their own needs.

Key takeaway: It’s not the interest rate you get but the interest cost you pay over the term that matters. If you locked in a great 5-year fixed-rate but ended up paying a $15,000 penalty to get out of it a few years in, you didn’t end up ahead. 

Managing Risk 

Some clients are concerned about payments fluctuating during a mortgage term, but this fluctuation is manageable to some extent. We often recommend making mortgage payments as if you had a higher fixed rate but a lower variable rate term.

EXAMPLE: $500,000 mortgage

Current average 5-year fixed rate: $2,050/monthly mortgage payment

Current average 5-year variable rate: $1,725/monthly mortgage payment

The difference here is $325/month.

By prepaying an additional $325/month toward your variable rate mortgage, you are helping pay down the mortgage balance much faster by taking a variable rate. Depending on rate fluctuations, you could save an additional 5 years off the total amortization by this simple strategy alone.

As rates eventually increase, you can scale back the prepayment to keep your total monthly payment the same, but you would have already significantly paid down the balance and saved more on the interest.

A lesser-known alternative is working with a lender that doesn’t change the monthly mortgage payments on a 5-year variable rate mortgage due to rate increases. When rates increase, more of the payment is allocated towards the interest rather than the principal, allowing you to maintain the same payments. The downside is that this also results in a longer amortization. Still, regular prepayments can also effectively manage cash flow and secure a more flexible mortgage solution.

Recently the media has focused their attention on future mortgage rate increases. What is important to note is that the Canadian and worldwide economies are still very heavily indebted. According to most economists, with inflation a huge focus right now, some rate increases are expected in 2022, but sustained rate increases are unlikely as worldwide economies continue to recover.

Regardless of your rate decision, a customized financing solution to meet your needs is always recommended. Don’t hesitate to contact me today for a complimentary review.

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Christina Pentlichuk, 

Mortgage Agent