Why Variable-Rate Offerings Are Still a Strong Choice

The Canadian Real Estate Association revealed in a report that the national home price has spiked by 28% annually in January. The constant increasing of mortgage rates have compelled federal and provincial level authorities to intervene which has resulted in the announcement of implementation of a stricter tax regime for non-residents homebuyers in Ontario along with a 2% tax on foreign home buyers which was outlined in Nova Scotia’s budget.

Moreover, fixed mortgage rates are becoming increasingly expensive because of the yield on five-year Government of Canada bonds reaching nearly 2.5% in the last week as compared to 1.25% at the end of 2021. The five-year mortgage rates are already close to 4% with variable rates coming up to the 3% mark by early summer.

Since the Bank of Canada is planning to implement further rate hikes this year due to inflation, many Canadians have concerns whether the benefits of a variable mortgage will be diminished due to mounting rates.

Crystal Mamchur, owner of Flare Mortgage Group, highlighted that even with the prospect of more hikes, fixed-rate offerings remain the more expensive option by far. “There have definitely been a lot of inquiries coming from my clients: ‘Should I fix in, in now the time? There’s been a little bit of panic with the increase, but I’, still seeing a lot of people choosing variable rate mortgages because the spread between the prime rate and what you can get on a variable rate is quite high right now”.

The attractiveness of variable-rate mortgages advanced from pandemic-era momentum, as suggested from the data compiled by Ratehub. The requests for variable rate within online platform increased by more than 40% from 2019 to 2020 and perceived a further increase of approximately 50% annually from 2020 to 2021. In comparison, requests for fixed rates were 14% lower than 2020 and 31% lower than 2019. However, they still represented more than 68% of total requests last year.

Ratehub said, “One of the most striking developments since the beginning of 2020 has been the increase in popularity of variable-rate mortgages and last year was no exception. Fixed rates climbed for the first time since the onset of the pandemic and continue to rise – and with, variable-rate mortgages became increasingly popular”.

An interesting aspect to highlight is that those Canadians who can finance mortgage payments for their children tend to be more inclined towards fixed rate mortgages. This is because they feel comfortable with something that they know will be stable over long term. However, for first-time buyers, who are not able to decide whether to obtain a fixed rate mortgage or a variable rate mortgage, it is advisable for them to consider the changes they have perceived in the last five years. For example, if first-time buyers have perceived any significant changes to their finances or have shifted from a bigger home to a smaller home or vice versa, it would be recommended for them to obtain variable rate mortgage as it would be easier for them to adjust payments according to their financial situation.