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Variable Rate vs Fixed Rate Mortgages

Is it better to get a fixed or variable interest rate on your mortgage right now?

With a quickly changing housing market and rapidly increasing interest rates, as a Hamilton Mortgage Broker we receive calls from our clients that are more torn than ever about whether to go with a Variable Rate or Fixed Rate mortgage.

If you are new to the mortgage space, before we go too much farther, here is a quick explanation about the difference between variable and fixed-rate mortgages.

Historically, with the benefit of hindsight, variable-rate mortgages have been the hands-down winner over fixed. With downward trending rates over the last several decades, the interest cost benefits of Variable Rate Mortgages have held true at least up until the last few years.

Leading up to and during the pandemic, fixed-term rates hit historically unheard-of low rates. During this period it made sense to lock into a fixed rate to take advantage of this low rate period.

Unfortunately, the ultra-low interest rates of the last few years are now a fond distant memory. With “bank prime” at the time of this writing at 3.7% and discounts on “purchase mortgages” as high as 90 basis points off prime, your current affective rate would be 2.8%. In contrast, a 5-year fixed rate is around 5%, which means that prime would have to increase by 2.2% for the effective rate on the Variable Rate Mortgage to reach the level of a 5-year fixed.

As Variable Rate Mortgages fluctuate with prime, the magic question is how high will prime increase? It also depends on how quickly and how long will it remain high before the Bank of Canada begins the cycle to start lowering it again.

Taking a fixed-rate mortgage instead of a variable at this point can be viewed as insurance against the rate and subsequent payments increasing beyond the point of the current fixed mortgage. Again, you have to determine what are the odds of the rates increasing that high, how fast they would likely increase to that level and if they did how long would they remain there.

You have to decide if you are willing to take the risk that rates will increase substantially more.

Everything else being equal, in most cases we, your Hamilton Mortgage Broker, are recommending that our clients strongly consider a variable rate mortgage at this time. As each situation is different, we also highly recommend discussing your options in person before you get too far into the process! Give us a call today to see your options. (905) 309 – 8799

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