Fixed or Variable in These Unusual Times?
Fixed or variable—it’s the classic rate decision many mortgage shoppers are faced with. And it’s only been made more complicated since the start of the pandemic.
Towards the latter half of 2019, variable (AKA "floating”) rates were flying off the shelves. At that time, for many qualified borrowers they were going for as low as prime – 1%.
But a lot has changed since then.
In March, fears over the COVID-19 pandemic and the subsequent lockdown forced most banks and other mortgage lenders to cut their prime rates from 3.95% to 2.45% within the span of just one month. Higher funding costs also caused them to scale back variable-rate discounts to just prime – 0.15 to 0.25%.
But as variable-rate discounts were drying up, fixed rates were on the move in the opposite direction, setting fresh historic lows throughout the summer.
Why? In large part due to the Bank of Canada’s Quantitative Easing program that was launched in response to the COVID crisis, in which it purchased up to $5 billion worth of government bonds each week. This eased liquidity concerns, and kept bond yields low throughout much of the year, and bond yields lead fixed rates.
That led to a dramatic shift in mortgage selection by borrowers.
In a recent BMO survey, a majority of homebuyers (57%) said they would choose a fixed rate when it comes time to renew. Among those still on the fence, they admit that COVID has made them more likely to gravitate towards a fixed-rate mortgage. Just 8% said they’d be more likely to choose a variable rate.
Why the shift in mortgage preference?
There are several reasons why fixed rates have grown in popularity in recent months.
First, they’re among the most competitive mortgage products on the market—and are often priced even lower than current variable rates. And many believe variable rates have no more room to fall, given that the Bank of Canada’s overnight target rate is already at just 0.25%. While Bank of Canada Governor Tiff Macklem has indicated that negative rates are "in our toolkit,” he has also downplayed the benefits of sub-zero rates.
Second, homebuyers are attracted to the stability that fixed-rates offer. They can either lock in a rock-bottom rate for five full years, or opt for a floating rate that will rise as soon as the Bank of Canada raises interest rates, even if rate hikes aren’t currently on the table.
Fixed vs. variable: the outlook
Most analysts don’t expect the BoC to start hiking rates until at least 2023, which is when inflation is expected to return to full capacity. Some forecasters, such as those at TD Bank, don’t expect the first-rate hike until 2024.
But even so, as Globe & Mail contributor Rob McLister notes, "Fixed rates are now so low that even a single quarter-point rate hike from the Bank of Canada—three to four years from now—could result in borrowers paying more interest in a variable than a 5-year fixed.”
With odds like that, most buyers seem happy to lock in their sub-2.00% 5-year fixed rate and sleep soundly for the next five years.
If you are in the process of shopping for a mortgage and are undecided whether to take a fixed or variable rate, a TMG mortgage broker can help you understand the pros and cons of each, and offer personalized solutions.