There are many factors when it comes to choosing a mortgage product that will suit your particular needs. Rates, terms, prepayment options, and switching penalties all need to be considered; which is where the guidance of an experienced mortgage broker, like Hatch in Ottawa, can really make a difference.
One of the primary choices that’s getting a lot of attention these days is whether to opt for a variable or fixed rate mortgage. The differences between these two options can result in various degrees of risk vs. financial reward, depending on the larger market forces at play.
For those who can stomach the risk, significant savings can be had by choosing a variable mortgage, which tends to have a lower cost of borrowing for the mortgage holder, allowing you to pay off your mortgage sooner. The downside is that variable rate mortgages can rise with very little notice as interest rates go up. Fixed mortgage rates can also rise, but at least you’re guaranteed an expected rate for the term that you lock your mortgage in.
In the past few months, there has been an increase in demand for variable rate mortgages as the spread between variable and fixed rates has continued to grow, bucking the trend for most of last year:
In 2016, however, the spread between fixed and variable rates was very thin, narrowing to as little as 0.2 percent of a percentage point, according to RateHub. As a result, Canadians saw little point in taking on the risk of a variable rate. – Global News
What’s Fueling the Growing Spread Between Fixed and Variable Mortgage Rates?
Fixed Mortgage Rates are Rising
Fixed mortgages are becoming more expensive. With the election of Donald Trump, and his promises of massive infrastructure spending, inflation is expected to rise in the U.S. This has created upward pressure on bond markets, as lenders are demanding higher interest rates to maintain their returns against inflation. In the bond market, which directly competes in the same financing pool as mortgage lenders seeking long-term investors looking for safe returns, this means that bond yields are also rising. When bond yields go up, fixed mortgage rates in Canada tend to rise in tandem so that lenders can continue to make a profit. An increase in the U.S. Fed benchmark interest rate from 0.5 to 0.75, last December, is also fueling this trend.
Variable Rates Holding Steady or Dropping
Conversely, variable rate mortgages continue to be low and stable. Unlike the economic situation in the United States, the Canadian economy is currently in a holding pattern. As such, the Bank of Canada is showing no signs of changing its key overnight rate in the foreseeable future, which is the primary driver of variable mortgage rates in Canada. Most variable mortgages rates are based on the lender’s prime interest rate plus or minus a few points.
New Stress Test for 5 Year Fixed Mortgage Applicants
New Canadian mortgage regulations are also coming into play, as the federal government attempts to the slow what it perceives as an overheated housing market, especially in areas like Toronto, which saw an incredible 20% increase in housing prices last year.
For example, the appetite for the 5-year fixed mortgage, historically one of the most popular mortgage products in Canada, has been dampened due to a new stress test for mortgage applicants. Those applying for a 5-year fixed mortgage, must now demonstrate that they can handle their payments in the event of an interest rate increase, similar to those applying for a variable mortgage:
The federal government has made a series of recent changes to mortgage insurance rules, including raising minimum down payments for more expensive properties and introducing a more rigorous income “stress test” for home buyers. – The Globe And Mail
Other Factors to consider with Variable vs. Fixed Rate Mortgages
The growing spread between fixed and variable rate mortgages are an attractive incentive, but other factors, such as risk must be considered. Interest rates in Canada are at historic lows, but how long will they stay that way? Even the most seasoned economists have trouble predicting when rates will go up, and by how much. If, for example, rates were to increase by a point or two, how would this impact your ability to pay your mortgage. If variable rates go up quickly, to the point of personal stress, what kind of penalties would you incur if you wanted to switch your mortgage to a fixed rate, or a different term?
New homebuyers, especially those with young families and tight budgets are more likely to opt for the stability of a fixed rate mortgage, even if variable rates are fairly lower than fixed rates in the current market.
The choice between a fixed rate mortgage and a variable rate mortgage can have a real impact both your monthly budget, and on the speed with which you can pay down your mortgage and increase the equity in your home.
Hatch is Here to Help – Apply Today
Not only can you apply quickly and easily online for a new mortgage, or to refinance or renew a current mortgage with Hatch, you will also have the backing of a seasoned mortgage broker with over 30 years experience, Dan Martel (aka Papa Bird), to help you determine and secure the right mortgage to suit your specific needs, at some of the most competitive rates available in Canada. Apply today to see how Hatch can help you finance your dream nest with the right kind of mortgage for you!
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