Interest rates

Interest rates are rising. Is it time to switch to a fixed rate mortgage?

This column is an opinion of Mark Ting, a Foundation Wealth partner that helps clients achieve their financial goals. He can be heard every Thursday at 4:50 p.m. on CBC radio as On the Coast’s personal finance guide. This column is part of CBC’s Opinion section. For more information on this section, please read our FAQs.

For the first time since 2018, the Bank of Canada raised the overnight interest rate to curb inflation and cool the housing market. With rising interest rates, many variable rate mortgage holders are considering switching to a fixed rate mortgage.

With the 0.25% increase in the overnight rate, I am now paying 1.65% on my variable mortgage. Assuming the Bank of Canada follows through on its plan to hike rates five more times over the next 12 months, my rate would still be below 3%, which is lower than the current offer on a mortgage at fixed rate.

Bond market interest rates, which are used to price fixed-term mortgages, have been rising for nearly a year. Six months ago, it was easy to get a five-year fixed-term mortgage for less than 2%, compared to today’s rate of around 3.3%.

Although my variable mortgage allows me to switch to a fixed rate version at no cost, I am not considering this for the following reasons:

  • The time to lock in to a fixed rate was months ago when rates were much lower. Fixed rates are well above their lows while variable rates are just starting to rise. The current differential between the variable rate and the fixed rate is significant and a variable mortgagee could absorb six or seven more rate increases of a quarter of a percent before reaching the current fixed rate of 3.3 percent.
  • I doubt the Bank of Canada will follow through on its plan to hike rates five more times by this time next year.
  • History has shown that central banks generally fail to meet their rate hike targets. Variable rates offer more flexibility and lower penalties than fixed rate mortgages. Many borrowers end up breaking their term if they have to refinance or sell.

The penalty for breaking a variable mortgage is usually three months interest while a more punitive calculation is usually used with a fixed rate.

The main reason to switch to a fixed rate is if you feel anxious every time the Bank of Canada makes an interest rate announcement. For a five-year fixed rate, 3.3% is still historically low and below current inflation levels, so if you prefer peace of mind, the fixed option makes sense.

It’s a seller’s market with signs of buyer exhaustion

The current rate hike comes at a time when the real estate market is showing signs of slowing down. Over the past two months, buyers with expiring mortgage pre-approvals have boosted demand and home sales as rates rise. For now, it is still a “seller’s” market, but we are seeing signs of buyer exhaustion.

The stock market correction and rising inflation are variables that will act as headwinds on real estate. People don’t feel as “rich” as they used to and are hesitant to make big purchases or act like “mom and dad’s bank”.

In terms of tailwinds, real estate is seen as an inflation hedge, while immigration is expected to bring thousands of people to Metro Vancouver at a time when supply is still low and cost construction has never been so high.

While I don’t expect a major crash, it wouldn’t surprise me if we had a calmer than usual spring housing market with fewer sales and subdued prices.