In recent years, the decision might have been a clear-cut one for many borrowers. Not any more, according to a mortgage and real estate expert
Canadian mortgage borrowers found themselves at a crossroads as Bank of Canada overnight rate cuts during the past year narrowed the gap between fixed and variable mortgage rates, prompting renewed debate over which option offered the best value in a shifting market.
For months, the spread between fixed and variable rates remained stubbornly wide, discouraging many from considering variable options. Now, with further rate cuts forecast for 2025, some would-be homeowners and those facing renewals have started to eye variable rates as a potential opportunity despite the inherent risks.
Victor Tran, mortgage and real estate expert at Rates.ca, said the current market dynamic had made the decision less clear-cut.
“Currently, the difference between fixed and variable rates is minimal, and it seems like a rate drop is still on the table, which means that anyone taking a variable rate now would benefit from rates lower than current fixed rates with even one 25-basis-point overnight rate reduction,” Tran said.
“However, as we’ve seen in the past, rate cuts are never guaranteed, and taking a variable rate mortgage will still involve some level of risk. Working with a mortgage broker can help determine individual risk tolerance and whether a fixed or variable rate is the better choice based on a consumer’s individual circumstances.”
Assessing risk and comfort in a volatile market
Tran emphasized that the choice between fixed and variable rates remained highly personal, hinging on several key factors. “Can the homeowner afford potential rate hikes during the course of the mortgage term if the economy shifts?” he said.
“Buying a home is a significant investment, both economically and emotionally. Is the consumer able to handle the uncertainty that comes with a variable rate mortgage or would they feel more comfortable with the stability of a fixed-rate mortgage?”
Many borrowers valued the predictability that fixed rates provided. In most cases, variable-rate products were offered at rates comparable to fixed-rate options, depending on the lender.
Chris Allard, an Ottawa broker with Smart Debt Mortgages, said the decision to choose fixed or variable at renewal hinged on the individual client. He added that borrowers who felt confident about further Bank of Canada rate cuts before year-end might still lean toward variable rates.
“But by and large in my clientele, even if they think there’s opportunity to save with the variable, they’re kind of going: ‘You know what, I need some stability,’” he told Canadian Mortgage Professional.
Beyond risk tolerance and comfort, borrowers were urged to consider their future plans. “Does the homeowner plan to stay in the same home, or to move in the next several years? Variable-rate mortgages can have lower pre-payment penalties than fixed-rate mortgages, often the equivalent of three months' worth of interest,” Tran said.
“Pre-payment penalties for fixed-rate mortgages are based on the greater of three months' worth of interest or the interest rate differential, which measures the amount of interest that would have been paid had the mortgage been paid to term. Depending on the size of the mortgage and the length of the remainder of the term, this can cost up to tens of thousands of dollars.”
Broader market context and future outlook
Industry analysts have pointed to the Bank of Canada’s cautious approach and the uncertain economic outlook as reasons for borrowers to remain vigilant.
While some economists have predicted further rate cuts in 2025, others have warned that inflationary pressures or global shocks could stall or even reverse the trend.
“Another softer inflation print could raise odds for additional easing relative to our current base case that assumes the BoC has already reached the end of the cycle,” Royal Bank of Canada (RBC) senior economist Claire Fan said.
BMO’s Sal Guatieri wrote, “Stubborn core inflation sets a high bar for another Bank of Canada rate cut, reducing the odds of a move on September 17.” He added that if future job and inflation reports remain subdued, the Bank could ease in October, eventually taking the policy rate down 75 basis points to 2.0% before next spring.
“Mortgage holders need to be realistic about their own financial situation and appetite for risk,” a leading mortgage broker told Canadian Mortgage Professional in a recent interview. “There’s no one-size-fits-all answer, especially in today’s market.”
