Royal LePage Realty Plus Oakville

Preparing for a mortgage renewal?

More than half of Canadian mortgages will renew before the end of 2026. The Bank of Canada lowered its key interest rate from 5.0% to 4.75% on June 5th, so many homeowners are wondering which mortgage type to opt for upon renewal — fixed or variable? Understanding the options available and anticipating changes is essential to successfully navigating today’s evolving mortgage landscape.

At a time when real estate prices remain high due to sustained demand, choosing the right mortgage product is crucial. Anticipating interest rate fluctuations and adjusting your financial strategy accordingly can make a big difference in managing your long-term mortgage. As always, we recommend consulting an experienced mortgage broker to help you navigate the choices and make the best decision.

Listed below are some considerations to help you get started in making an informed decision about an upcoming mortgage renewal.

Current situation

While variable rates were historically lower during the height of the pandemic real estate boom, the trend has recently reversed, with variable rates now higher than fixed rates. The average five-year variable interest rate offered by mortgage lenders currently hovers around 6.7%, while most fixed rates are typically 5.6%.

A variable mortgage rate depends on a number of economic factors, like the key overnight lending rate, which is set by the Bank of Canada. Although Canada’s central bank recently cut its key rate for the first time in four years, a change in course could occur if inflation levels increase in the coming months. At this time, economists do expect further cuts to the lending rate by the end of 2024. The trend is set to continue into 2025, unless economic conditions change significantly. Regardless of declining interest rates, the historically-low rates Canadians have been accustomed to over the last two decades are now and are expected to be “a thing of the past.”

What you need to know about variable rates

When it comes to variable-rate mortgages, mortgage payments automatically increase.

However, with variable loan structures with fixed-payment options, monthly payments remain unchanged, even in the event of a rate increase. Instead, this type of variable-rate mortgage adjusts the mortgage amortization period (the time it takes to repay the mortgage in full). This is due to the fact that a smaller proportion of each payment is allocated to repaying the mortgage principal.

Understanding your needs

The choice between a fixed- and variable-rate mortgage largely depends on the borrower’s risk tolerance and personal situation. Are the payment fluctuations associated with variable rate mortgages conducive to your lifestyle? Even if interest rates begin to fall, there are many economic factors influencing their direction, which can occur at various times during your mortgage term.

The right mortgage product for you depends on your short- and medium-term situation. If you’re currently in a period of transition (career change, separation, etc.), you may want to opt for a fixed-rate that offers you some stability.

Fixed-rate mortgage with a shorter term

Amidst economic uncertainty, more borrowers are opting for fixed-rate mortgages with shorter terms (one, two or three years). This way, in an environment where rates are quickly changing, borrowers can lock in predictable monthly payments without the need to stay with the same rate long term.

Hybrid-rate mortgage

This option combines customized features of both a variable and a fixed rate — part of the mortgage has a fixed interest rate and the other has a variable interest rate. This way, the borrower can benefit from the best of both worlds.

Convertible mortgage

This type of loan offers the possibility of converting a variable interest rate loan into a fixed-rate mortgage, or vice versa, before maturity, thus allowing borrowers to adapt their mortgage financial strategy to market conditions.

Consult a professional

If you don’t already work with a trusted mortgage professional, reach out and we would be happy to connect you with someone from our network.

This entry was posted in Buying and Selling, Home Finance and tagged , .

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