The thing is, each of these mortgage rate options work differently.
Which means this question continually intrigues (or frustrates) Canadian home buyers. Here's a quick overview of what's behind them to help your decision. And for your most accurate answer, our friendly mortgage experts have the goods.
Usually, depending on your situation, when getting a mortgage or renewing for your next term, you'll need to make a personal financial choice as to which mortgage rate is better for your goals — a variable or fixed rate.
Each of these rate types have fundamental differences in how they operate and what drives them. Let's take a look at these differences to help understand why the choice isn't always obvious.
To learn more about the pros and cons relating directly to your mortgage, check out our blog: Variable vs Fixed Mortgage Rates.
Usually, around 60% of our clients choose a 5-year fixed rate mortgage, versus less than 30% for a variable one. Fixed is the rate that your parents, and your parent’s parents, went with for decades. It essentially guarantees that your mortgage payments will not change for 5 years, which allows time to settle into a payment budget and know exactly how much is being paid down on your principal. A 5-year fixed is also the term that banks like to compete on, and so it often carries the best value.
Canadian lenders set their fixed mortgage rates by looking at their own borrowing costs. Fortunately, their borrowing costs are relatively easy to follow, because they're linked to the fluctuations of Bank of Canada 5-year bond yields. Banks use bond yields to cover the costs they incur when financing mortgages.
Read more here: How are mortgage rates set?
So, when you choose a 5-year fixed rate mortgage, the bank or lender is essentially taking on all that daily-fluctuation risk for you.
Variable rate mortgages are riskier because they're tied directly to the prime rate — but are lower than fixed rates. During our recent period of historically-low rates overall, more clients are choosing to take the variable risk.
Variable rates are described as a 'discount off of prime':
When you choose a variable-rate mortgage, depending on your length of term, you're the one taking on the rate risk for your payments to potentially increase.
The typical difference between a variable rate and a 5-year fixed rate can be anywhere between 0.25 to over 1%. With that difference, some feel that it's enough to offset the added risk, and are willing to absorb the increased payments if rates do rise during their mortgage term.
Update Nov. 8, 2021: Right now, in fact, our variable rates are at an all-time low, with a difference over fixed rates higher than a 1.5% margin — leading to more of our clients choosing a variable-rate mortgage term than usual.
In a CIBC study done a few years ago, it was shown that 88% of the time, it paid-off financially to take a variable-rate mortgage over a fixed-rate mortgage.
Your choice can come down to three questions:
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