While variable rate mortgages used to be a popular choice for many, they have since left a bad taste in the mouths of many given the substantial increases to prime rate in 2022 and 2023. Economists were forecasting increases by as much as 1.25% in 2022, but the actual number ended up being 4.00%, with additional increases in 2023. For this reason, even the most die-hard variable rate advocates have been hesitant to take the chance on variable, leading the vast majority to choose a fixed rate product. 

But now that the Bank of Canada has started to cut their rate, variable rate mortgages are starting to look more promising.  

Does this mean that you should be considering a variable rate? 

 

The Return of Variable Rate Mortgages? 

Variable rate mortgages will typically offer a lower starting point than fixed rates, setting you up for initial savings. However, in today’s economic climate, variable rates have taken an unusual turn; they’re not just higher than fixed rates—they’re significantly higher, often exceeding them by more than 1.00%. This is a rare and noteworthy shift, indicating a substantial premium on variable rates over their fixed counterparts.

Starting with a higher variable rate places you at an initial disadvantage. The larger the gap between the two products, the faster you dig yourself into a financial hole, and the harder it becomes to pull yourself out of it. Moreover, the longer it takes for your variable rate to dip below the current fixed rates, the deeper this financial pit grows, extending the time it takes to recover and climb back into the black. In other words, putting you ahead compared with your original fixed rate option. 

Despite the hefty premium on variable rate mortgages today, there’s still potential to come out ahead—if rates decrease as predicted. Four of the big six banks anticipate a 0.75% rate cut from the Bank of Canada this year. BMO and TD are forecasting a 0.50% reduction. For 2025, further cuts between 0.75% and 1.50% are forecasted. If these cuts happen, a variable rate could prove advantageous. However, this is a big “if.”  The current forecasts from the big banks were outlined in my recent blog on more rate cuts coming.  

Given the market uncertainty, many are reluctant to accept the risk associated with variable rate mortgages. Although they may become attractive again in the future, we’re not at that point just yet. It’s also crucial to remember that forecasts over the past four years haven’t exactly been reliable. 

In my popular blog, The Ultimate Guide to Choosing Fixed or Variable, I discuss everything that you should be considering before choosing a variable rate. Even in a healthy market when variable rates are available at a deep discount over the fixed rate options, they are not for everyone. 

 

Fixed Mortgage Rate Movement 

Fixed mortgage rates are always changing.  Even though the long-term forecasts are for rates to drop, fixed mortgage rates can and will move in either direction along the way. This is why you may hear me talking about fixed rates being in a downward trend one week, with them facing upward pressure the next. Lately, they have been all over the place. 

Last week’s disappointing inflation numbers released by Statistics Canada resulted in a spike in bond yields, which ended their downward trend.  The yields have now risen to the point where it’s possible that we could see some increases to fixed rates at any time. In fact, one lender has already moved forward with a hike to their 3-year fixed product.  If the yields continue to rise, then more increases to fixed rates will be imminent. 

This can change at any time. The bond yields will start to trend back down again, which could happen by next week, in a few weeks, or perhaps even longer. You would need to have a crystal ball to know for sure. Time will tell. 

 

Conclusion 

The choice between fixed and variable can vary depending on the person’s financial situation, goals, tolerance for risk, etc. What’s right for one person may not be right for the next. Many will often go to their friends or family to ask for mortgage advice. While they mean well, they are basing their advice on their own financial circumstances. They may feel perfectly comfortable with a variable rate while it could be something that terrifies you. 

Everyone can be a bit different. 

As I say in my book, the best choice isn’t always the one that saves you the most money. It’s the one that allows you to sleep soundly at night.