Is a variable rate actually crazy right now?
When you're choosing a mortgage, one of the biggest calls you'll make is fixed versus variable. A variable-rate mortgage can give you flexibility and potentially lower rates, but it also means your rate can climb if the market moves against you.
You might think that in 2023, with rates higher than we've seen in years, going variable would be a little unhinged. But what if it's not?
We're going to walk through the real benefits of a variable rate and sketch out a scenario that might shift how you see it. Our goal is to lay out all the angles so you can make a decision that actually fits your situation.
You could pay less interest if rates drop
One of the main upsides of a variable rate mortgage is that you might end up paying less interest over the life of your loan when rates are down. Your mortgage rate is tied to the prime rate, which moves based on things like the Bank of Canada's overnight rate, inflation, and how the economy is doing. If prime drops, your rate drops, and you could save thousands of dollars in interest charges.
Keep in mind that we may be at the peak of Bank of Canada rate increases. A lot of us are hoping to see rates trend downward over the next year or so.
More room to breathe when life changes
A variable rate mortgage can give you more flexibility than a fixed rate. With a fixed rate, you're locked into a specific rate and payment for the entire term, which makes it tough to adjust if your financial picture shifts. With a variable rate, your payment can change when your rate changes, so you have more room to tweak your budget if you need to.
This can be especially helpful if you're self-employed, have income that varies month to month, or work in a field where paycheques are less predictable.
You can lock in later if you want
Even though a variable rate mortgage moves with the market, most lenders will let you switch to a fixed rate at any point during your term. This can be appealing if rates are low and you want to lock in that rate for the rest of your mortgage.
That way, you get the flexibility of a variable rate while still having the option to go fixed if it makes sense.
Breaking your mortgage costs less
If you need to break your mortgage before the term is up, you'll face a penalty — and it can be significant. With a variable rate mortgage, the penalty is typically three months of interest. With a fixed rate mortgage, it can be much higher.
This matters if you think you might need to sell your home or refinance in the near future.
Here's what the numbers look like today
We've covered the general benefits, but let's look at a real scenario with today's rates. Right now in Canada, fixed rates are generally lower than variable rates. For example:
$375,000 mortgage
Fixed with a 5 year term = Monthly Payment - $2147
Variable Monthly Payment - $2355
Two important things to note with this scenario. First, with a fixed rate you're locked into that rate for the entire term. Your payment is $2147 a month for five years. Second, the variable rate is currently over $200 more a month. But as prime moves over those five years, so does your payment.
If prime dropped back to pre-pandemic levels, your monthly payment would be $1962 — which would save you money each month. *Above numbers are hypothetical and for illustrative purposes only. This is not a commitment to lend, pre-approval or approval.
What this means for you
A variable rate mortgage can be a smart choice if you value flexibility, can handle some risk, and see the potential for lower rates down the road. But remember that a variable rate moves with the market, which can mean higher payments if rates climb.
Talk to a mortgage professional to figure out if a variable rate fits your situation and to understand the risks and benefits that come with it.
