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Canadian homeowners consider switch to variable rate mortgages after big rate cut
November 6, 2024 | Posted by: Angela Robinson
As the Bank of Canada recently delivered a significant 50-basis-point rate cut, taking its benchmark policy rate to 3.75%, Canadian homeowners and potential buyers are reevaluating their mortgage options. This decision brings much-needed relief for mortgage holders, who have been grappling with higher monthly payments and the rising cost of living. As a result, many homeowners are now exploring the benefits of switching from fixed-rate to variable-rate mortgages, sparking renewed interest in a mortgage strategy that could yield substantial savings over time.
Understanding Canada’s Mortgage Market
In Canada, most mortgages renew every three or five years, with amortization periods typically stretching over 20 to 25 years. This structure, though common, can expose homeowners to rate fluctuations at renewal time, a feature contrasting with the U.S. market, where fixed rates over 15 to 30 years are available. Homeowners in Canada typically have two primary options:
- Fixed-Rate Mortgages: Linked to bond prices and more stable over time, these mortgages offer predictability but are less responsive to policy rate changes.
- Variable-Rate Mortgages: Linked to the central bank’s policy rates, these mortgages fluctuate with rate changes and can present opportunities for cost savings during periods of rate cuts.
The recent rate cut has prompted more Canadians to consider the latter option, especially as the rising cost of housing has pushed some prospective buyers to delay their purchase until more favorable rates are available.
Why Homeowners Are Switching to Variable Rates
Mortgage brokers across Canada are seeing a surge in inquiries from homeowners interested in switching to variable-rate mortgages. Andy Hill, a Vancouver-based mortgage broker, has reported increased demand from clients exploring variable-rate options since the announcement of the rate cut. In Hill’s calculations, switching to a variable rate could save a homeowner an average of CAD 4,500 on a CAD 400,000 mortgage, even after accounting for switching fees of up to CAD 4,800. These potential savings are driving homeowners to weigh the benefits of making the transition.
Is It Worth Making the Switch?
Despite the immediate appeal of variable rates during a period of rate cuts, the decision to switch is not without risks. While variable-rate mortgages can offer lower payments when rates drop, they also expose homeowners to the possibility of higher payments if rates rise again. As a result, some homeowners—particularly those who are more risk-averse—are opting for short-term variable-rate mortgages. This strategy provides flexibility, allowing homeowners to consider switching back to fixed rates if interest rates decrease further.
Mortgage broker Johnny Hoang from Vancouver notes that many clients are drawn to the flexibility of short-term variable-rate mortgages, while Andrew Galea, a Toronto-based broker, highlights that many of his clients are choosing to refinance at this time, exploring options for renewal and aiming for better rates.
The Broader Market Impact
The effect of the recent rate cut is rippling across Canada’s housing market, though the response has been somewhat cautious. While major banks have reduced their prime rates to 5.95%, mortgage shoppers are watching closely for additional rate cuts. According to a survey conducted by EveryRate.ca, 74% of Canadians interested in buying or refinancing said they would feel comfortable proceeding only if policy rates drop below 3%. Mortgage activity, therefore, may remain subdued until more pronounced rate reductions occur, which experts like Andy Hill suggest might not happen until late 2025.
Looking Ahead: Will New Policies Spur Activity?
The federal government is expected to implement new mortgage policy reforms in the coming year, which could ease the path to homeownership for Canadians taking out insured mortgages. Penelope Graham, a mortgage expert at Ratehub.ca, anticipates that these changes will help stimulate mortgage activity, making it easier for new buyers to enter the market. For those who’ve been waiting on the sidelines, the combination of additional rate cuts and policy reforms could present an ideal opportunity to either secure a mortgage or refinance an existing one.
Conclusion: Weighing Fixed vs. Variable in an Evolving Market
Switching from a fixed-rate to a variable-rate mortgage could offer substantial savings for Canadian homeowners, particularly during a period of rate cuts. However, this choice isn’t one-size-fits-all. It requires careful consideration of individual risk tolerance, long-term financial goals, and the likelihood of future rate changes. As the Bank of Canada signals potential for more rate cuts and new policies, Canadians may find that switching to variable rates offers a strategic advantage—one that’s worth the effort to explore, especially in today’s competitive mortgage landscape.
