Fixed or Variable Rate: What Is the Best Option for Your Mortgage in 2024?

Prepare for the purchase of a property

You’re getting ready to buy a home and know that your first step is to get pre-approved for a mortgage. You’ve been following the news and are aware that high interest rates have recently seen their long-awaited first drop. Is this a sign that you should opt for a variable rate mortgage instead of a fixed rate? Well, the answer is not so obvious.

Compare fixed and variable rates

First, consider that bank fixed rates are currently listed lower than variable rates for 5-year closed terms. This difference is almost more than 1%, depending on the lender. This means that if you choose a 5-year closed loan with a reduced variable rate today, you have to hope that the Bank of Canada will reduce its key rate by more than 1% in its next announcements to really take advantage of the variable rate.

A concrete example

For illustration purposes, let’s take a $250,000 loan with a 20% down payment. At the time of writing, depending on your profile, you could get a fixed rate that would result in an uninsured mortgage payment of about $1,200. In comparison, based on the variable rates posted, your payments could be closer to $1,350, a difference of about $150 per month as long as the key rate doesn’t change. So, in the short term, choosing a variable rate might not be your best option if the Bank of Canada doesn’t lower its key rate.

Long-term outlook

To really start taking advantage of a variable rate, the key rate would have to drop by more than 1% quickly. At quarter-point increments, this could take time, unless the Bank of Canada continues or even accelerates the cuts. There are still four announcements scheduled in 2024, on July 24, September 4, October 23 and December 11. Anything is possible!

That said, the odds of the policy rate continuing to fall are very plausible. Indeed, it is very likely that inflation will reach the central banks' target as early as next year, which would justify further cuts to the policy rate. Similarly, in the event that the Canadian economy enters a recession, it would also be very likely that the policy rate will fall even more quickly, which would favour the variable rate option.

Conclusion

It all depends on your confidence in the Canadian economy. If you are convinced that interest rates will continue to fall, a variable rate could allow you to save money on your loan over the next five years. To make an informed decision, it is best to consult a mortgage broker. Gail Meili, a real estate broker in Saint-Lazare and Hudson, works with several real estate professionals and, if necessary, she can refer you to trusted professionals. Do not hesitate to ask her for advice. You can contact her by email at gailmeili@icloud.com or by phone at 514 969-4134.