Here is a question I’ve been hearing a lot recently:
“Is now the time to lock in my variable rate mortgage?”
Well, there are a lot of variables to be considered when trying to answer this question and at the end of the day there is no one size fits all answer, however I will share my thoughts to possibly help you with your decision.
As I’m sure you’re aware, both fixed and variable rates have been on a slow decline over the past number of months with variable rate mortgages dropping more rapidly due to consistent cuts to prime, which have been facilitated by the Bank of Canada.
The rates for 5 year fixed rate mortgages are now fairly close to the effective rate of a 5 year variable rate mortgage, and many people are now wondering if now is the time to hedge their bets by locking into a fixed mortgage.
Let’s take a look at some of the variables at play.
What to consider?
After the most recent rate cut by the Bank of Canada, the Prime rate at most lenders is currently set at 4.95%. If we take the example of a Variable Rate Mortgage with a discount of .70% off prime, your current effective rate would be 4.25%. When we compare this to a 5-year fixed mortgage of 4.10%, the 5-year fixed mortgage is lower by .15% which is lower, but not by much.
The question is where are rates headed and how fast are they going to move?
What do you think?
If you think that fixed rates are going up, or are stalled out, then locking into a fixed rate mortgage might be a safe bet. However, the majority of indicators, including communications from both the Bank of Canada and the U.S. Fed, indicate that rates, at least prime, are going to continue to drop. Keep in mind that just one drop of .25% in Prime by the Bank of Canada would result in an effective rate lower than the 5-year fixed rate if you were to have locked in today.
Most signs are pointing to a minimum of an additional .50% rate cut this year, with some saying as much as an additional 1.00% cut. Even if you look at a total of .50% of cuts by the end of the year, your effective rate will have dropped to 3.75%, which is certinaly more attractive than the current 5-year rate of 4.10% that you would have locked into if you did it today. And, assuming additional rate cuts in 2026 and possibly beyond, the savings could potentially be even greater.
Even if the rates didn’t drop below 3.75%, your effective rate would be .35% lower.
So, what does that mean in actual savings? Is it worth the risk?
Well, assuming that you have a $500,000 mortgage, the savings would amount to approximately $1,700 per year, assuming you had four more years of savings to go, that would amount to over $6,500!
Of course, this is going on the assumption that rates will be declining, despite being a relatively safe bet, it is not guaranteed. For some, the security of knowing that your interest rate is fixed for the term of your mortgage is worth the potential cost, for others of taking on a bit of the risk of the unknown is well worth the risk!
As always, contact me for a free mortgage consultation and discuss your options.