Variable mortgage rates are a hot topic and have been for several months now (as of writing – August 5^th, 2020). The Bank of Canada key interest rate (policy rate) now sits at a level last seen in over a decade, since the most recent 3 key interest rate cuts took place between March 4^th and March 27^th (1 planned cut followed by 2 emergency cuts). Subsequently, the banks’ prime lending rate has dropped from 3.95% to 2.45%. What does this all mean?

As a result, those currently under variable mortgage rates are reaping the benefits immediately. Variable rates have dropped, and mortgages have become more affordable. Homeowners are finally seeing reductions in their monthly mortgage payment after 3 years of prime rate increases, followed by 18 months of a steady 3.95% prime lending rate.

For further context, the price of variable mortgage rates is directly tied to the banks’ prime lending rate. As you have likely noticed, variable rates are typically priced at a discount (ex. ‘prime minus 0.50%’). In other words, you can take the banks prime lending rate and subtract the contract discount given (ex. 0.50%) to determine the rate being offered at any given time. Historically speaking, variable mortgage rates are more favourable than fixed mortgage rates.

But currently, we are in a recession. Does that change anything?

We have tumbling markets and a bumpy recovery ahead of us. In fact, the worst, in terms of economic impact, has yet to come according to some analysts. All speculative of course. The question you likely need to know is: Are variable rate mortgages, or fixed rate mortgages, best for me right now?

First and foremost, variable mortgage rates are for more risk tolerant borrowers. Why? Simply put, uncertainty in rate fluctuations does exist. As your variable mortgage rates fluctuate with the prime lending rate, you can imagine that this rate choice is not for the faint of heart. However, rates tend to stay low when the economy is messy, so if you agree with analysts’ projections that we are heading into a much deeper recession, variable is way to go for the next 3-5 years.

Two pros if you are willing to give variable mortgage rates a shot:

1. By default, variable mortgages yield the lower of the 2 possible penalty clauses (3 months interest rather than interest rate differential), thus making them more attractive
2. Variable mortgages (through most banks) allow you to lock into current market fixed terms anytime throughout the duration of your term (good escape clause)

If you are considering variable mortgage rates over the traditional fixed terms, here are two recommendation we’ll make to help ensure you’re not swinging in the dark:

1. Market watch: Keep a good eye on the market and keep up to date with economic outlooks whenever you can. Most times, if something volatile is happening, a skim through the latest financial headlines will clearly indicate this.
2. Build a trusting relationship with your broker: That’s us! We have the resources to help. And while we can’t predict the future, we can provide industry insight and trend to help make decisions with more confidence

We have all the information you need of variable mortgage rates… or any rates for that matter, among a broad and deep knowledge of everything related to mortgage financing. Call us today at (905) 455-5005.