Introduction
After our latest 75 basis point rate hike, those who thought that we should be done were disappointed to hear that the Bank of Canada isn’t done yet. Right now, our target rate is at 3.25%, big banks have adjusted their peak rate forecasts upwards by 25 to 50 basis points, and the uncertainty is still out there.
More so recently, our clients have been wondering whether they should go with a variable or a fixed rate mortgage these days, so let’s talk about it in this video!
Variable Rate Mortgage Trends
Nowadays, a lot of variable mortgage holders are starting to feel the pinch with rising mortgage costs. And perhaps because of this, more people are wondering if they should switch to a fixed rate mortgage, which can give them more certainty.
Take a look at this chart that shows mortgage preferences over time and you can see that in early 2022, right before the rate hikes started, variable mortgages were more popular with 55% of people choosing them, and it was actually the highest percentage seen based on the chart that goes back to 2013. And it seems like there might be an inverse relationship between interest rates and the share of variable mortgages. When rates are low, more people choose variable mortgages. And when rates are peaking, more people switch to fixed mortgages — and that’s really the opposite of what they should be doing!
Interest Rate & Recession Projections
At this point, I think we are in exceptional times and people are afraid that interest rates are going to go to a place that we haven’t seen since the early 90’s. It’s true that it can, but the probability is pretty low. Yes, interest rates are still going to go up because inflation is still coming in hot, but the big banks are now expecting that we’ll peak by year’s end at somewhere close to 4%.
Our fast rising rates will hurt our economy, and the central bank knows it too. Oxford Economics thinks that because Canada’s economy is so sensitive to interest rates, we’ll go into a recession. In fact, 78% of major economists now believe that Canada will be in for a recession and most believe that it’s going to be somewhere in Q1 of 2023. And after this hard landing, rates will probably have to do a u-turn back down.
Now, the experts think we’re peaking soon, but what does the overall market think? Let’s head to bond yields, which reflect where the market thinks rates will go in the future, and you can see that 5 year bond yields are plateauing. So what this means is that future rate hikes have probably been fully priced in.
Pros & Cons Of Fixed vs. Variable Mortgages
Now let’s tie all of these to fixed and variable mortgages. The big benefit of going with fixed rate mortgages is that you will definitely have more financial certainty compared to variable rates. On the other hand, variable rates are usually cheaper than fixed rates at the time you start your mortgage.
The risk here is that if interest rates continue to go up by a lot during your mortgage term, then you might end up actually paying more on variable compared to fixed rates. But if things swing the other way and rates come down faster or by more than what is currently priced in by the bond markets, then you’d be better off with a variable mortgage.
Should You Go With a Fixed Or Variable Mortgage In Canada Now?
Fixed rates are based on bond yields, and we just mentioned that the market has probably fully priced in the rate hikes and it looks like it’s plateauing. It’s also driven by where inflation goes and how our economy is doing. If you agree with the economists and the market, then it’s possible that you might be locking in peak fixed rates right now. It comes down to what your risk tolerance is.
For financial stability, fixed rates would be for you. For the best rates in the next five years, variable might have the edge. We did a poll recently on Instagram just to ask our followers, and it seems like the majority of you still think variable is the way to go. But perhaps a hybrid might be the sweet spot for those who are looking for a bit more certain fit over the next 1-2 years, but you still feel like things are going to get better after that. In this case, it might make the most sense to go with a 1 to 2-year fixed rate mortgage and give yourself the flexibility to switch to variable after that.
How We Can Help
With the end of rate hikes near, we’re going to see more confidence come back to the real estate market in the next few months. And because there is less buying competition right now, this might end up being a great time to invest in real estate when you can bargain for deep discounts.
If you can cash flow positive using future proof interest rates and get 25 to 30% off peak prices, it’s a great deal. Remember, high interest rates aren’t forever, and when rates drop, you’ve benefit from deep discounts, and your holding power and returns will look even better.
So if you want to find out what kind of deals are out there in Toronto, we would be happy to chat. We’re a real estate sales brokerage that focuses on investing in freeholds in core Toronto, so we can help you see things more clearly and match you up with the best investment property for you. After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. So, just connect with us if you want to learn more about our services!
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