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Is a Fixed Mortgage Best?

The Bank of Canada has already raised prime interest rate by 0.25% this year. The biggest question among those looking to renew their mortgage is “Will prime rate go up again?” You may be wondering if a fixed rate mortgage that will lock in a lower interest rate is best for you.

Like with all things financial, the answer is: it depends. Personal finance is personal, so what is best for one person may not be the best for another. But if rates do go up, getting a fixed term before they rise seems like a good idea.


What’s the best mortgage rate?

The best 5 year fixed rate on Rateshop.ca right now is 3.49%, just 0.04% more than prime rate. Typically, the Bank of Canada raises or lowers interest by 0.25 percentage point steps. If rates go up on April 18th, the next Bank of Canada interest rate announcement date, then you will continue to pay 3.49% - which would then be 0.21 per cent less than prime. If rates go up again this year, then at 3.49% you’d be paying 0.46 per cent less than prime.            

The best 5 year variable rate right now is 2.55%, which is prime minus 0.90. Variable rates are always written as prime minus a number, as variable rates change along with prime rate. If the Bank of Canada raises prime rate on April 18th, this variable rate mortgage would increase to 2.8%. Still prime minus 0.90, but 0.25 per cent higher.

As you can see for yourself on the page, the monthly payment for the 2.55% variable rate (assuming a $400,000 purchase price and 20% down) is $1442. The same mortgage at the 3.49% fixed rate has payments of $1596, meaning an annual savings of $1848. If you looked at these two numbers alone, the variable rate is the clear winner. But there is more to consider.

Earlier I said that the Bank of Canada usually raises or lowers prime by 0.25 per cent, but that isn’t always the case. Between October 9th, 2008 and March 4th, 2009, the BoC lowered interest rates 4 times, each by 0.50 per cent. In just five months prime went from 4.50 per cent to 2.50 per cent, a 2 per cent difference!

We are no longer in the interest-cutting economy that we were 10 years ago. According to the Canadian Real Estate Association, the average home price in Canada has increased from $362,100 in February, 2008 to $609,700 in 2018. If prices had only increased by inflation, then the average home price would be $427,613.64. Accounting for inflation, home prices have increased 42.6% in Canada. During the same time frame, the average Toronto home price has increased by 64.5%.


The Break Even Point

Even if prime rate does go up by 0.50 per cent, a rate of 3.05% is still lower than a fixed rate of 3.49%. It would take a whole percentage point increase to have the current lowest variable rate exceed the current lowest fixed rate mortgage by a measly 0.06 per cent. You could take advantage of the delay and save a lot of money, right? Well, hold on.

We’ve gotten used to long periods with low interest, with seven years of no change or decreases. This could give a false sense of security when looking towards the future. Five years is a long time, especially in the current real estate market. Sharp increases have happened before. There is a possibility that rates will increase even beyond 1 per cent.

The Bank of Canada makes 8 prime interest rate announcements per year: whether it goes up, goes down, or stays the same. After April 18th they will have already made 3, leaving 5 more to go for 2018. So far this year we’ve seen one increase and one stagnation.

If the possibility of a rate increase of 1 per cent or more fills you with anxiety, then a fixed rate mortgage is best for you. It’s possible to save money with a variable rate mortgage, even if rates increase, but is $1848 worth the emotional stress? Lock in your great low rate and sleep easy. 

Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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