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Variable Vs Fixed. What IS the difference anyway???

June 1, 2020 | Posted by: Zenon Komarniski

Fixed versus Variable in this market?

Whether you already have a mortgage or are looking to get your first mortgage amid COVID-19, there are some things you should know regarding fixed and variable rate mortgages during this time.

If you currently have a mortgage, you may have heard on the news about interest rates rising and you may be unsure of where you stand. It may seem confusing, but when it comes to mortgage rates and interest, we are seeing things moving in both directions - rates are going up and going down simultaneously. Depending on the mortgage you currently have (fixed or variable) you may be experiencing different effects with regard to COVID-19 and may be unsure where you stand. Here are some things to know:

 

Variable Mortgages

Variable rate mortgages, which represent 1 in 4 mortgages in Canada, are driven by the Bank of Canada’s overnight lending rate. Having a low variable rate may lead you to have some concerns surrounding the increasing mortgage rates in the country and where that leaves you.

The Bank of Canada has already made several cuts to the bps rate for a full 1.5% drop. It is important to understand that these cuts to the overnight lending rate actually get passed down to variable mortgage rate holders - unlike for fixed rate mortgages.

If you currently have a variable rate mortgage you most likely already have a discount from prime. As a result, you may have already seen your rates decrease and you may now be sitting around 1.85% to 2.2% variable interest currently. You may be concerned about these rates rising again but the good news is that it is unlikely that you will see significant rate volatility or increases in interest rates on a variable mortgage.

A mortgage professional can help assess your particular financial situation and mortgage, but most variable-rate mortgage holders will benefit the most by not doing anything with their mortgages at this time as the rates are expected to remain low and possibly even decrease.

Fixed Rate Mortgage

Many Canadians are currently locked into a five-year fixed rate mortgage and these individuals are currently seeing a different trend with their mortgage. To help you understand this further, it is vital to recognize that fixed rates are typically linked to the bond market in Canada, as opposed to the Bank of Canada which is the driver for variable-rate mortgages. Therefore, you can have the bond market and Bank of Canada doing two separate things resulting in both an increase and a drop in interest rates, depending on which rate type of interest you hold.

If you are one of the many Canadians with a five-year fixed-rate mortgage, you are likely seeing your interest rates increasing due to the resulting turmoil in the stock and bond markets. The changing market is resulting in a pull-back from investors who do not want to lend out funds at such low rates. In addition, with the COVID-19 mortgage relief options, banks are seeing a very large increase in demand for mortgage products and inquiries. This is continuing to drive demand with no increase in supply, which also results in rate increases.

If you are currently in a fixed-rate mortgage, it is important to understand your options and how long they expect rates to be increased. If you are considering converting your fixed-mortgage to a variable-rate mortgage, you will likely have a 3-month payment penalty or an Interest Rate Differential (IRD) penalty. Depending on your mortgage amount, this may be a small price to pay for a lower interest rate for the foreseeable future. I would be happy to discuss this with you to guide you to the best decision for your financial situation and capacity.

New Mortgages

If you do not have an existing variable or fixed mortgage and are in the process of getting a new mortgage, refinancing or renewing you may be wondering what to do. While mortgages will vary on a case-by-case basis, the current consensus from mortgage professionals is that a variable-rate mortgage will be the way to go, especially if you can get a discount on prime that puts you around 2.20%. While there is talk of mortgage rates increasing, the impact to a variable-rate mortgage is likely to be minimal (if at all).

 

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