Finding the sweet spot in today's mortgage market

In the world of Canadian mortgages, the spring market is ushering in a noteworthy trend: a dip in rates for various mortgage options, despite the lack of explicit signals from the Bank of Canada about impending rate cuts. This shift has sparked a debate among homebuyers and refinancers: What's the current sweet spot in choosing between variable, short-term fixed, and long-term fixed mortgages?

Recent observations indicate a slight decrease in mortgage rates, making the mortgage market more appealing than it was last fall when rates hit their peak. Specifically, the rates for some three- or five-year fixed mortgages have fallen below five percent, with certain insured five-year mortgages dropping to as low as 4.99 percent. This decline is linked to the bond market, which fluctuates based on the anticipation of interest rate adjustments by the Bank of Canada.

Fixed mortgage rates offer the stability of unchanged monthly payments and interest rates throughout the term. On the other hand, variable or adjustable-rate mortgages fluctuate in accordance with the Bank of Canada's decisions, potentially altering the amount a homeowner pays monthly.

The preference for variable-rate mortgages surged during the pandemic, offering the lowest rates at the time. However, the Bank of Canada's recent rate hikes have put variable-rate mortgages at the more expensive end of the spectrum, currently ranging between 6.1 to 6.5 percent.

The decision between a variable-rate mortgage with floating payments and a fixed rate hinges on several factors. If the Bank of Canada were to reduce its policy rate significantly within the next three years, a variable-rate mortgage could become more economical than a fixed-rate mortgage over the term. Yet, this calculation depends on future rate cuts and inflationary pressures, making it a gamble.

The ongoing speculation about rate cuts adds complexity to choosing between fixed and variable options. Although the chances of further rate hikes seem slim, unforeseen global events could disrupt current forecasts, underscoring the inherent risks of opting for a variable mortgage.

In the current climate, a notable preference is emerging for three-year fixed-rate mortgages. This option strikes a balance by offering a slightly higher rate than five-year mortgages but promises an earlier renewal, potentially at a lower borrowing cost. Meanwhile, one- and two-year fixed mortgages, although promising earlier renewals, generally come at significantly higher rates, making them less appealing compared to variable rates.

Variable-rate mortgages, despite their higher costs, provide more flexibility. This is particularly relevant for homeowners who might sell their home or break their mortgage early. The penalty for breaking a variable-rate mortgage typically equals three months' interest payments, while fixed-rate mortgages can impose heftier fees based on the remaining term and market rate differences.

Final Thoughts

Ultimately, the decision between variable, three-year fixed, or five-year fixed mortgages does not have a one-size-fits-all answer. It depends on individual financial situations, risk tolerance, and future plans. Those contemplating a mortgage should consider discussing their circumstances with us at Fred and Martin Mortgages to identify the most suitable option, taking into account potential penalties for breaking the mortgage and the possibility of rate fluctuations.

As the mortgage landscape continues to evolve, understanding the nuances of each option can empower homeowners to make informed decisions that align with their financial goals and lifestyle changes. While the three-year fixed-rate mortgage currently appears as the sweet spot for many, individual preferences and market dynamics will always play a critical role in this important decision.