Why variable-rate holders are rethinking their mortgages
The financial world took a sharp turn between March 2022 and June 2023. The Bank of Canada raised rates nine times in that stretch, pushing the standard borrowing cost to 4.75% — a staggering 4.5% higher than during the pandemic, when rates sat at an all-time low of 0.25% to prop up the economy.
That surge drove the Prime rate — the benchmark lenders use to price variable products — to an almost unprecedented 6.95%. The lowest five-year variable mortgage rate jumped to 5.8%, a world away from the 0.89% you could get in 2021. Here's the twist: the lowest variable rate now sits higher than the lowest fixed option. That almost never happens — variable is usually cheaper.
With inflation running hot (the main reason the Bank kept hiking), rates weren't heading back to pandemic lows anytime soon. Variable-rate holders faced a strikingly different landscape than they'd seen in decades, and many started asking: is it time to lock into a fixed rate?
How variable and fixed mortgages work
When you get a mortgage, you choose between a fixed rate and a variable rate.
A fixed-rate mortgage locks your interest rate for the entire term. It's usually higher at the start, but it won't budge — so your payments stay the same the whole way through.
A variable-rate mortgage moves with your lender's prime rate. When prime goes up or down, your rate follows. Depending on how your mortgage is set up, that means either your payment changes or the split between interest and principal shifts while your payment holds steady.
The cost of staying variable
Interest rates climbed faster in those 20 months than they had in the previous two decades. If you held a variable-rate mortgage, your rate was 390 basis points — call it four full percentage points — higher than the year before. That's an extra $3,900 a year for every $100,000 you'd borrowed.
Market experts were expecting a possible further 25 basis points (a quarter of a percent) increase by the end of 2023. If you had a $500,000 mortgage balance, that could mean paying $145 more per month on interest by December 2023 than in May — and a stunning $1,202 more per month than in January 2022.
Demand for variable-rate mortgages fell hard. A Ratehub.ca study showed that inquiries for variable rates made up only 5% of total user submissions in the first five months of 2023, down from 26% in 2022.
One way to stop the bleeding: switch to a fixed-rate mortgage and lock in a rate that won't move for the rest of your term. The most popular term is five years.
Your three options if you're worried about rising rates
If climbing rates have you on edge, you've got three paths forward with your mortgage. You can convert your current mortgage from variable to fixed, refinance to a new mortgage that fits your needs better, or ride it out with your existing setup. Each one has trade-offs, and the right call depends on your situation.
Option 1: Convert from variable to fixed with your current lender
Most lenders let you flip your variable-rate mortgage to a fixed rate mid-term at no charge. The catch: you'll usually lock in a fixed rate for whatever's left of your term with that same lender. So if you're two years into a five-year term, you'd lock in a fixed rate for the remaining three years.
The other hitch: you'll typically have to accept the current fixed rate your lender is offering, which might not be the sharpest rate on the market. Before you go this route, run the numbers to see what it'll cost you over the rest of your term.
Option 2: Refinance your mortgage
Refinancing could open the door to lower rates from different lenders. The downside: you might face a prepayment penalty for breaking your current mortgage term early. If you've built up enough equity, you may be able to stretch the loan back out to 30 years (re-amortize) to bring your monthly payment down.
Refinancing isn't just about swapping rates or terms. You might also use it to tap the equity in your home for other goals — renovations, paying off high-interest debt, or investment opportunities.
Weigh the potential savings in monthly payments against the costs: legal fees, appraisal fees, and penalties. A mortgage broker can walk you through the math and help you find the solution that works best for your situation.
Option 3: Stay with your variable-rate mortgage
Despite the recent hikes, you might decide to stick with variable. After all, interest rates move — they could drop again down the road.
Even if rates climb a bit more before they start falling, the average rate you pay over your term could still land lower than today's fixed rates, especially if your lender has a fair policy for how they split rate changes between your payment amount and how fast you pay it down (the amortization period).
The bottom line: what makes sense for you
Switching from a variable-rate to a fixed-rate mortgage is a big move. Think about your personal circumstances, how much uncertainty you can handle, and what your financial plans look like down the road before you pull the trigger. Always talk it through with a mortgage expert to make sure you're making the best call for your situation. Your home is likely the biggest investment you'll ever make — take the time to get it right.
If you feel the time is right to make the change, or you have questions, feel free to click here to book a call. A quick 15-minute conversation could save you thousands.
Compare different rates and scenarios side-by-side to see your options. Click here to download our app.
Where rates are today
Reading about rates is one thing—seeing today's is another. See today's live mortgage rates, updated every morning from every lender we work with, along with our forecast on where fixed and variable are heading next and a live fixed-vs-variable breakdown. If you're closing in the next 120 days, that's also where you'll find the free rate hold.
