Variable rate mortgages haven’t looked this attractive in years.
That’s not to say they’re the right choice for people buying a home or renewing a mortgage. If you have some financial stress in your life already, a fixed-rate mortgage is a better choice. But if you want to lock down a very low rate today and are OK with the idea that it could rise in the months and years ahead, then consider the variable rate.
I wrote a column talking about the benefits of variable-rate mortgages in late March. One of my arguments was that the penalties for breaking them are typically much less than for fixed-rate mortgages, while the other was that they’re cheaper than the fixed option. Since then, fixed-rate mortgages have become an even better deal. According to Ratehub.ca, the differential between the best fixed and variable mortgage rates recently hit 1.04 per cent, which is the largest gap since Dec. 1, 2011.
A quick check with a few mortgage brokers via their online rate sheets showed the differential between five-year fixed and variable was closer to 0.80 to 0.85 percentage points – 2.41 per cent for variable at one firm, and 3.24 per cent for fixed. But that’s still a substantial savings. It would take four increases of 0.25 per cent in the Bank of Canada’s overnight rate to make a variable-rate mortgage more expensive than the current cost of a five-year fixed rate mortgage. The overnight rate influences the prime rate at banks, which in turn guides variable-rate mortgages.
One mortgage broker wrote this week that the great deals on variable-rate mortgages have changed his thinking. “Over the past few years my advice has generally favoured five-year fixed over five-year variable rates,” he wrote on his blog. “Today, the inherent uncertainty in variable rates remains, but its increased potential saving may now be worth the risk.”
About 68 per cent of mortgage holders have a fixed-rate mortgage, 28 per cent have a variable rate and 4 per cent have a combination mortgage, according to a report issued last fall by Mortgage Professionals Canada, which represents mortgage brokers.
