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November 3, 2020

2020 Thoughts on Fixed vs Variable

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Fixed or adjustable – it is the ongoing mortgage product decision many mortgage buyers are faced with. And it has only been made more complex since the beginning of the pandemic.

Towards the second half of 2019, variable rates have been the most obvious and popular choice. But a great deal has changed since then.

In March, fears over the COVID 19 pandemic as well as the consequent lockdown forced the majority of banks along with other mortgage lenders to reduce their key rates from 3.95 % to 2.45 % within the span of only one month. Higher funding costs also caused them to scale back again variable rate discounts to 0.15% to 0.25%.

But as variable rate discounts have been scaling back, fixed prices have been setting new historic lows throughout the summer and fall.

Why? In large part on account of the Bank of Canada’s Quantitative Easing program which was released in reaction to the COVID crisis, where it bought a maximum of five dollars billion worth of federal bonds every week. This eased liquidity issues, and also kept bond yields low throughout much of the season, as well bond yields lead fixed rates.

Which resulted in a remarkable change in mortgage selection by borrowers.

In a recently released survey, a majority of homebuyers stated they will select a fixed price when it comes time to renew their 5 year mortgage term. Among those still over the fence, they acknowledge that COVID makes them much more prone to gravitate towards a fixed rate mortgage, with only 8% indicating they would be much more likely to select a variable rate.

Exactly why the change in mortgage preference towards fixed rates?

They are among probably the most competitive mortgage products in the industry – and are usually priced less than recent variable rates. And many think adjustable rates don’t have any more space to drop, since the Bank of Canada’s overnight target fee has already been at only 0.25 %. While Bank of Canada Governor has suggested that negative rates are “in the toolkit of ours, he’s also downplayed the advantages of sub-zero rates.

Second, homebuyers are drawn to the balance that fixed-rates offer. They are able to often secure in a rock bottom price for 5 full years, and choose a floating price which will grow as soon as the Bank of Canada raises interest rates, even if rate hikes are not at present on the dinner table.

Fixed vs. variable: the outlook

Most analysts do not anticipate the Band of Canada to begin hiking rates until a minimum of 2023, some forecasters do not anticipate the first rate hike until 2024.

Fixed rates are so low right now that even a very small rate rise from the Bank of Canada within the next few years might end up in borrowers paying much more interest in a variable versus a low rate 5 year fixed.

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