With all the current uncertainty in the world there is increased confusion on what is the best mortgage product, fixed or variable.
With the war with Iran still simmering it is causing oil to remain above $80 per barrel and the price of gas to hover around $1.70 per liter.
The U.S. appears to be picking a fight with us over trade, slapping us with tariffs, with more threatened to come.
The cost of living is increasing on both sides of the border, resulting with renewed inflation concerns both in the U.S and Canada.
National debt continues to climb in both the U.S. and Canada, with heightened awareness in the U.S. however just as quickly behind the scenes here at home.
All of this has been putting upward pressure on U.S. long term bond rates, which fixed term mortgages are directly tied to. With Canadian bond rates closely tied to the U.S. bond market any increases to the U.S. bond yields will result in a increase to our bond rates and ultimately higher fixed mortgage rates.
Conversely, while there is some talk from the U.S. of potential short term measured rate increases to Prime to address inflation concerns; there is little to any similar talk or signals from the Bank of Canada pointing towards any increases to Prime. Due to an overall relatively weak economy and sluggish growth rates, the Bank of Canada cannot afford to increase rates for fear of further weakening the economy and potentially triggering a recession.
Luckily the U.S. Federal Bank and the Bank of Canada work independently of each other, so even if they were to increase Prime in the U.W. it wouldn’t directly lead to our Prime increasing. With Prime being currently at 4.45%, after applying available rate discounts, there is typically more than a .50% difference in effective rate between a variable rate and fixed rate mortgage, so the Bank of Canada would have to make two consecutive .25% rate increases just to break even with the current 5 year fixed rate.
If you are comfortable with the uncertainty of a variable rate mortgage, it still appears to be the more favourable option, at least on paper. However, at the end of the day only you know which option is best for you and it still comes down to your personal risk profile. Variable rate mortgages look great on paper however you have to be able to sleep at night. If the uncertainty of Prime would cause you any concern or anxiety, it is most likely not the right product for you. You would be better served with a fixed term mortgage, most likely either a 3, or 5 year fixed rate to give you peace of mind.