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.