What impact will the rate cut have on mortgages, both fixed and variable?
Currently, the most popular term is the three-year fixed rate (around low-mid fours) since variable rates are still 1% – 1.50% higher (around mid-high fives). However, once prime starts decreasing and the gap narrows, we expect to see more home buyers opting for the five-year variable rate (historically lower than fixed rates).
We can likely expect both fixed and variable to start coming down the 3% – 4% range in the next six months.
When should Homeseekers consider variable rates?
The decision to choose a variable rate vs a fixed rate depends on a few factors and can vary depending on the client.
First, everyone will have different risk tolerance and even though there are potential savings going with a variable rate, some clients will still choose a fixed rate because of interest rate risks and potential payment fluctuations. For the more savvy clients that follow financial news, they are more comfortable with risk and therefore want to take advantage of the potential savings as the prime rate decreases.
Second, is the time horizon. Some home buyers plan on selling their home in one to two years, so they go for a shorter-term fixed rate mortgage and not a five-year variable (the most common term for variable rates).
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I would recommend those looking to purchase to first get pre-approved and know what your qualification and budget are.
Kathy Lien
Senior Mortgage Broker, Peak Mortgage Co.
What are the main benefits and risks with variable rate mortgages?
One of the main benefits of a variable rate mortgage is to take advantage of Bank of Canada/prime rate cuts which translates to interest rate savings. If your mortgage is at a lender with a fixed payment, once interest goes down, you will pay more towards your principal and reduce your amortization. There are also some lenders (such as ScotiaBank) that will automatically reduce your monthly payment as interest rate decreases.
Another benefit of a variable rate is that the maximum penalty is three months interest penalty only, whereas fixed rates can potentially be higher. If interest rates drop, your penalty can be the higher of three months interest or Interest Rate Differential (IRD). IRD is the difference between your current rate and the market rate, and if interest rates drop a lot, your penalty can be significant.
The risk is that the opposite can happen. If the prime rate goes up, you can either pay more towards your interest (less towards principal) or have your monthly payments increased.
What advice do you have for people looking to purchase a home in the near future? Buy now? Wait for more rate cuts?
I would recommend those looking to purchase to first get pre-approved and know what your qualification and budget are. If the monthly payment (including property tax and maintenance costs) fits into your overall financial plan and you can comfortably afford it, then buy now when the market is slow. You can negotiate on prices, not be in bidding wars and have an overall more pleasant home buying experience.
I would not recommend buying if you are already stretched thin with your finances, as home ownership can come with some unexpected costs. You should open or continue to contribute to your FHSA and RRSP's home buyer's plan, so that you have adequate savings and down payment.
What about people looking to renew their mortgages? Should they consider switching from a fixed rate to a variable rate?
There is always a penalty with getting out of a fixed rate mortgage (three months penalty or IRD). However, most lenders allow you to convert from a variable rate into a fixed rate mortgage any time during the term.
One strategy for those with mortgage renewals coming up is to consider a variable rate mortgage first. Then once the interest rate comes down some more, they can reassess and either keep it in a variable or lock into a fixed term mortgage (with no penalty). Every lender will have rules around this, so please consult your lender or bank for all the details.
