Should you get a fixed or variable mortgage?

Key Concepts

• Basis Points (bps): A unit of measure used in finance; 100 basis points equals 1%.
• Fixed-Rate Mortgage: A loan where the interest rate remains constant for the entire term.
• Variable-Rate Mortgage: A loan where the interest rate fluctuates based on the lender's prime rate, which is influenced by the Bank of Canada’s key interest rate.
• Mortgage Default: Failure to meet the legal obligations of a loan, resulting in missed payments.
• Affordability Crisis: The economic condition where housing costs significantly outpace income growth, limiting access to homeownership.

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1. Bank of Canada Policy and Economic Outlook

The Bank of Canada has maintained its key interest rate at 2.25%. Governor Tiff Macklem describes the current economic climate as a "dilemma," balancing two opposing forces:

• Inflationary Pressures: Driven by global oil supply constraints and geopolitical instability (specifically the war in the Middle East).
• Economic Stagnation: Characterized by "lousy" or flat GDP growth.
• Policy Stance: The Bank is currently in a "wait and see" mode, with uncertainty regarding future rate hikes or cuts expected to persist through the end of the year.

2. Mortgage Trends and Consumer Behavior

Ron Butler, a mortgage broker, highlights a significant shift in consumer preference regarding mortgage products:

• The Variable Shift: There is currently a 75-basis-point gap between fixed and variable rates. Consequently, approximately 50% of new mortgages are now variable, a sharp increase from the 15–20% seen two years ago.
• The "Set it and Forget it" Warning: Butler emphasizes that variable mortgages are not passive products. Borrowers must actively monitor the market, as risks can escalate quickly if interest rates rise.
• Strategic Advice: While variable rates are tempting due to lower immediate costs, Butler suggests that if a borrower can secure a fixed rate below 4% (specifically citing a 3.99% five-year fixed rate for those with less than 20% down), it is the "conservative, wise" choice.

3. Housing Market Dynamics

The Canadian housing market is experiencing regional divergence:

• Regional Performance: Ontario and British Columbia are seeing "wobbly" results with prices drifting downward. Conversely, provinces like Quebec have reached all-time highs, and Alberta has remained buoyant, though Calgary is showing signs of cooling.
• First-Time Home Buyers: Butler warns that those who purchased at peak prices in 2021 have seen market values drop by 30–35% in some areas. He advises potential buyers to prioritize lower house prices over interest rate fluctuations, suggesting that if prices are expected to fall further, waiting is the better financial decision.
• Economic Ripple Effects: A slowdown in home buying negatively impacts the construction sector and builders, creating a cycle where what is good for individual affordability may be detrimental to broader economic growth.

4. Mortgage Defaults and Financial Stress

The interview highlights a concerning rise in financial distress among homeowners:

• Default Statistics: In the Greater Toronto Area (GTA), mortgage defaults have risen to 41 basis points, up from 12 basis points in 2020.
• The Affordability Threshold: Butler notes that many households have reached a point where they can no longer stretch their income to cover both mortgage renewals and general inflation. He expects this trend of rising defaults to continue throughout the year.

5. Synthesis and Conclusion

The current Canadian mortgage landscape is defined by extreme uncertainty and regional volatility. The Bank of Canada’s neutral stance reflects the difficulty of managing inflation without stifling an already weak economy. For homeowners, the primary takeaway is that there is no "one-size-fits-all" solution. While variable rates offer immediate relief, they carry inherent risks that require constant vigilance. Ultimately, the market is undergoing a correction, and for many, the most prudent financial move—whether renewing or buying for the first time—is to prioritize long-term stability and price-point awareness over short-term rate chasing.