With the Bank of Canada’s recent 0.5% interest rate cut, homebuyers and mortgage holders are looking for answers. Should you stick with a fixed rate, go with a variable rate, or even start with variable and lock in later as rates potentially drop further? Let’s break down the options using real numbers and real scenarios to help you decide what’s best for you today.
The Current Mortgage Landscape
Historically, variable-rate mortgages have been cheaper than fixed rates, but the situation is different in today’s market. Right now, fixed rates are actually lower than variable rates due to the aggressive rate hikes we’ve seen over the past few years. Here’s a quick look at the current landscape:
- Fixed-rate mortgage (5-year term): Approximately 4.2%.
- Variable-rate mortgage: Approximately 5.5%.
But with the Bank of Canada expected to continue cutting rates into 2025, dropping by another 0.75% to 1.25%, what does that mean for homebuyers today?
Real-World Scenario: Buying an $800,000 Home
Let’s walk through a real-world example. You’re buying an $800,000 home with a 20% down payment, which leaves you with a $640,000 mortgage. You plan to stay in this home for 5 years, and you’re deciding between three options: a fixed rate, a variable rate, or a hybrid approach where you start with a variable rate and lock into a fixed rate after 9 months.
Here’s how your monthly payments and total costs would look over 5 years.
Option 1: Fixed-Rate Mortgage at 4.2%
- Monthly Payment: $3,130
- Total 5-Year Cost: $187,783
With this option, you lock in a predictable payment for 5 years, which offers peace of mind. You won’t have to worry about any rate increases or changes, making it easier to budget.
Option 2: Variable-Rate Mortgage at 5.5% (with expected rate reductions)
In this scenario, you start with a variable rate of 5.5%, but we’re factoring in the expectation that rates will gradually drop by 1% over the next 8 months—about 0.25% every 2 months.
- Monthly Payment (initially): $3,634
- Total 5-Year Cost: $196,509
While variable rates typically offer savings over time, in today’s market, they start off higher, and even with the anticipated rate cuts, you’ll still end up paying more compared to a fixed-rate mortgage. The total cost over 5 years is around $8,726 more than the fixed-rate option.
Option 3: Hybrid Approach — Variable for 9 Months, Then Fixed
This is where things get interesting. Let’s say you start with the 5.5% variable rate, but after 9 months (when rates are expected to drop), you lock into a lower fixed rate of 3.8% for the remainder of your term.
- Monthly Payment (first 9 months): $3,634, then dropping to around $3,271 after locking into the fixed rate.
- Total 5-Year Cost: $183,216
This hybrid approach ends up being the cheapest option. You take advantage of short-term rate cuts and then lock in for stability when rates are lower, saving you $4,567 compared to locking into a fixed rate today, and over $13,293 compared to staying with a variable rate for the entire 5 years.
What Should You Do?
Based on the numbers, here’s how to think about your options:
- Go with a fixed rate if you want stability.
If the idea of fluctuating payments makes you nervous or you want the security of knowing exactly what you’ll be paying every month, locking in a fixed rate today at 4.2% makes sense. You won’t have to worry about any surprises, and while you might not benefit from future rate cuts, you’ll have peace of mind. - Stick with a variable rate if you’re comfortable with risk
If you’re willing to take on some financial uncertainty and believe rates will drop significantly, staying with a variable rate can still be a reasonable option. However, even with expected cuts, this route is more expensive in the short term, and it may not save you as much over time as a fixed or hybrid strategy. - The hybrid option could be the best of both worlds.
Starting with a variable rate and locking into a fixed rate after 9 months seems to offer the best balance of flexibility and long-term savings. You’d benefit from short-term rate cuts, and by locking into a lower fixed rate later, you protect yourself from future increases.
The Bank of Canada’s recent 0.5% rate cut is a good sign for those hoping to see lower mortgage rates. However, choosing between fixed and variable rates is more complicated than ever. If you value stability and predictability, a fixed-rate mortgage is a solid choice. If you’re comfortable with a little more risk, the hybrid option—starting variable and locking in later—could offer the best long-term savings.