“Historically, the majority of Canadians who shop for mortgage rates have taken a variable rate the majority of the time,” says Dan Eisner, CEO of True North Mortgage in Calgary. “But not these days.”
Since January 2014, 56% of Canadian borrowers who applied for a mortgage through LowestRates.ca have gone variable, compared with 43% of those who got a five-year fixed. But this past August, there was a shift, where the five-year-fixed rate mortgage saw a sharp increase in applicants, with 59% of users on the LowestRates.ca site opting for this option versus only 39% opting for the variable mortgage.
“The spread between the variable and fixed rate mortgages has shrunk substantially since the Bank of Canada rate hike earlier this month,” says Eisner. Most people weren’t expecting the move but now the five-year fixed rate looks more attractive, he adds. “The variable rate is always lower but the question is, ‘by how much?’”
And while not all banks have increased their five-year mortgage rates yet, they may all do so by Friday. “By looking at long-term bond rates, it looks like the five-year fixed rate will go up between 0.1% and 0.15% by the end of the week…So if I were personally getting a mortgage, today is a good day to get the five-year fixed rate,” says Eisner.
Still, Justin Thouin, co-founder and CEO of LowestRates.ca crunched the numbers and notes, “Based on the past 30 years, staying in a variable-rate mortgage is still the right choice in the long run if your goal is to pay as little interest as possible.”
From a historical perspective, the variable mortgage rate is often lower, meaning homeowners pay less in interest overall. But it might be worth it to pay a little more for a fixed rate for the next five years, in case interest rates rise dramatically.
Indeed, Eisner doesn’t foresee interest rates going back down anytime soon. For one, he notes that the economy is strong and likely will keep strengthening over the next two years. And even though the difference between the rates on today’s five-year fixed and the five-year variable is razor-thin right now, that spread is likely to widen as the economy picks up steam and more interest rate increases are announced.
Eisner’s recommendation? Go for the five-year fixed term at today’s rate and aim to pay off your mortgage in under 10 years by making a concerted effort to make extra payments whenever you can.
“They almost all come with 10% or 20% annual prepayment options—whether you do it on the anniversary of the mortgage or throughout the year,” he says. If you’re diligent with repayment strategies, you can double up your payments and shorten your 25-year amortization schedule down to five or seven years. “The only time you see prepayment options missing is with super low rates so avoid those. It’s often worth paying a fraction more for the prepayment privileges”
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