Mortgage Said Knock You Out: Fixed or Variable, it can also be Flexible

Sep 15, 2023 | Finance

Don’t call it a comeback. Your mortgage has been here for years.

It’s recently become top of mind for many Canadians because mortgages are packing such a potent financial punch that’s been unexpected for many of us. The Bank of Canada has raised interest rates by 4.75% since March 2022. Interest rates are at a 22-year high, putting substantial financial pressure and strain on any homeowners still in the ring with their mortgage.

For instance, if the interest rate on your $500,000 mortgage increases from 2 percent to 5 , you’re now paying $14,729 more interest annually than you were last year (assuming a 30-year amortization). If your mortgage is $1 million, you’re paying $29,459 more per year in interest alone.

This creates a difficult choice for those of us whose mortgages are coming up for renewal. Do we opt for a high fixed rate mortgage in case rates increase even more in the future? Or, do we select a variable rate mortgage, hoping rates eventually drift downwards over time?

The answer depends on three factors that are unique to every homeowner. First, one’s financial situation. Second, one’s level of comfort with risk taking. Third, the market conditions and deals available when one’s mortgage comes due for renewal.

Let’s look at an example. If Jim and Jane are losing sleep at night because they’re strapped for cash and the rates on their $500,000 mortgage are stretching their finances thin, they might want to take a fixed rate mortgage to ensure stability in their financial planning and to ensure that no potential rate increase puts them on the ropes.

On the other hand, if Mike and Mandy are financially comfortable and will not suffer drastically from any further rate increases, they may want to take the risk on a variable rate mortgage. If rates drift downwards, they save money. If rates continue to increase, they’ll pay more than a fixed rate, but this increase won’t knock them out.

The key is to take a solid look at your own finances and to do what will help you sleep best at night.

There are other options too, as some financial institutions offer mortgages that combine fixed-rate mortgages, variable-rate mortgages and a Home Equity Line of Credit (HELOC) wrapped up in one mortgage product, providing both peace of mind and flexibility. For example, homeowners that opt for a fixed rate mortgage could use their HELOC to take advantage of annual mortgage prepayment opportunities should interest rates fall. ,

If your mortgage wants to knock you out, speak to an advisor today. Let’s plot the best path forward for you and your loved ones based on your finances, goals, and risk tolerance.