Choosing the Right Mortgage in a Changing Interest Rate Environment

The Canadian mortgage market is shifting fast, and so are interest rates. The Bank of Canada has cut rates twice in just under 60 days, after hiking them to 5%. Now, rates sit at 4.5%. This has left many Canadians wondering if we're through the worst of it or if more turbulence is ahead. So how should you approach choosing a mortgage today?

Let's break it down.

The Big Picture: What's Happening With Rates?

Economists from major banks, such as TD and CIBC, are predicting further rate cuts—potentially up to 1.75% over the next 24 months. That’s 175 basis points. Other banks like BMO are forecasting more conservative reductions around 1%.

Here's what that means for you:

• Short-term Impact: The immediate effects of these rate cuts have been more psychological than actual. While fixed mortgage rates have dropped by 1%, this hasn't translated into a major shift in the housing market yet.
• Long-term Outlook: Most forecasts suggest that fixed rates will drop another quarter to half a percent in the coming months, but they might hit a floor soon.

Fixed vs. Variable: Which One Is for You?

With rate cuts on the horizon, deciding between a fixed or variable mortgage can be tricky. Here’s what to consider:

Fixed Rates:

• Current Range: Fixed rates are currently hovering around 5% to 5.25%.
• Prediction: Fixed rates could go as low as 4.5% in the next 18-24 months, but further declines might be limited.
• Certainty: Fixed rates provide peace of mind. You know what you're paying over the term of your mortgage, which is appealing if stability is your priority.

Variable Rates:

• Current Range: Variable rates are in the prime -50 to prime -70 range, with some discounts going as low as prime -85.
• Flexibility: Variable rates offer flexibility, especially since their penalties for early payment are typically lower. If rates drop, your payment could go down too, allowing you to save or put more toward your principal.
• Risk: The downside is that variable rates could rise again in the next 2-3 years, potentially costing you more if the timing isn’t right.

Key Considerations When Choosing Your Mortgage

When picking between a fixed or variable rate, don't just focus on the numbers. There are personal factors to think about too:

"The most important thing is to look at your tolerance, your plans, and your future when you're considering your mortgage options."

Consider these factors:

• Prepayment Options: How flexible do you need your mortgage to be? If you want the option to pay more or pay off early, check what each mortgage allows.
• Personal Stability: Are you likely to move, change jobs, or experience other life changes? If so, you might want a more flexible mortgage, even if it costs more.
• Sleep at Night Factor: Do you want to know exactly what you’re paying every month, or are you okay with some uncertainty in exchange for the possibility of saving money?

‍Breaking Down the Numbers: A Hypothetical Scenario

Let’s look at a hypothetical scenario to make this decision easier.

• Mortgage Amount: $500,000
• Amortization: 25 years

We compared a three-year fixed rate at 5% to a variable rate of prime -85%. Over the term, the three-year fixed would cost $3,300 more than the variable option.

For some, this added cost is worth it for the certainty. Others might prefer the flexibility of a variable rate, even if it means taking on some risk.

Final Thought:‍

The right mortgage choice depends on your personal situation and risk tolerance. Whether you choose fixed for stability or variable for flexibility, the key is to make sure it aligns with your life plans and financial goals.

Quick Takeaways

• Rate Cuts Coming: Expect interest rates to drop up to 1.75% over the next 24 months.
• Fixed vs. Variable: Fixed rates offer stability, while variable rates provide flexibility and the potential for savings.
• Personal Situation Matters: Consider your life circumstances, tolerance for risk, and future plans when choosing your mortgage.

Whichever route you choose, it’s important to weigh your options carefully and choose a mortgage that fits your life, not just the market.