Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.
When I started working in the mortgage industry in 2005, variable rate mortgages saved you more money than fixed-rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced homeowners often took a VRM at mortgage renewal time.
However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.
Once again, the gap is widening. While fixed-rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction. Two years ago a VRM would be offered at Prime rate +.20%, but later it reverted to Prime -.30%. In recent months, rates have dropped even further with some lenders offering Prime -1.0%! You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45%. With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM.
Even if you are skittish, you can ask your Dominion Lending Centres mortgage broker to notify you if rates are going up and switch you to a fixed rate if they go above a certain percentage. Will your bank do that for you? I don’t think so. Be sure to have this discussion with your broker when your mortgage comes up for renewal or if you are considering a home purchase.