Fixed Vs. Variable Mortgage Rates

Fixed vs. Variable Mortgage Rates: What to Consider as Your Renewal Approaches

More than half of Canadian mortgages will renew by the end of 2026, making it crucial for homeowners to understand their options in a rapidly shifting financial landscape. As you prepare for your mortgage renewal, one of the most important decisions you’ll face is whether to go with a fixed or variable interest rate. Both options have their pros and cons, and the right choice for you will depend on your financial situation, risk tolerance, and market conditions.

Understanding the Basics

• Fixed Mortgage Rates: With a fixed-rate mortgage, your interest rate remains constant for the entire term of your loan. This stability allows for predictable payments, making it easier to budget and plan for the future. However, fixed rates tend to be higher than variable rates, especially during periods of low economic uncertainty.
• Variable Mortgage Rates: A variable-rate mortgage, on the other hand, fluctuates with the prime rate set by your lender, which is influenced by the Bank of Canada’s policy rate. While variable rates can offer lower initial interest costs, they come with the risk of increasing payments if rates rise.

The Current Rate Environment

As of August 19th 2024, the Bank of Canada’s policy interest rate sits at 4.50%, reflecting its ongoing efforts to manage inflation and economic growth. Over the past few years, we’ve seen significant rate hikes, now followed by continual rate cuts. This has made the decision between fixed and variable rates more complex than ever.

• Why Consider a Fixed Rate?
  In today’s environment, many Canadians prefer the security of a fixed-rate mortgage. Locking in your rate now can protect you from future increases, giving you peace of mind as you navigate other financial commitments.
• Why Consider a Variable Rate?
  Despite the potential for rising rates, a variable-rate mortgage might still be attractive if you believe that rates will stabilize or decrease over time. Some homeowners also appreciate the flexibility that comes with variable rates, such as the ability to make extra payments without penalty.

Pros and Cons at a Glance

• Fixed Rates:
  • Pros: Stability, predictable payments, peace of mind.
  • Cons: Typically higher rates, less flexibility in making extra payments.
• Variable Rates:
  • Pros: Potentially lower initial rates, more payment flexibility.
  • Cons: Payment uncertainty, risk of rate increases.

Tailoring Your Decision

When deciding between a fixed or variable mortgage rate, consider the following:

• Your Financial Situation: If your budget is tight or you’re risk-averse, a fixed-rate mortgage may offer the stability you need. On the other hand, if you have room in your budget and can handle potential payment fluctuations, a variable rate might be a better fit.
• Market Outlook: Stay informed about economic trends and forecasts. If experts predict stable or falling rates, a variable rate could save you money in the long run. Conversely, if rate hikes are expected, a fixed rate might be the safer bet.
• Long-Term Plans: Consider how long you plan to stay in your home. If you expect to move or refinance within a few years, a variable rate could offer more short-term savings.

Conclusion

As the renewal date for your mortgage approaches, take the time to weigh the pros and cons of fixed vs. variable rates. The right choice will depend on your unique financial situation, the current market environment, and your comfort with risk. Consulting with a mortgage advisor can also provide personalized insights to help you make an informed decision.

By understanding your options and staying attuned to market trends, you can choose a mortgage that aligns with your goals and secures your financial future.