If you’re in the market for a mortgage this summer, you could be wondering whether a fixed rate is the way to go.
The debate between a fixed or variable mortgage rate is an age-old one. Borrowers must decide whether they prefer the stability of predictable payments or the possibility of saving money with a floating rate that could change over the course of their term.
What will save the most money is always a top question among mortgage shoppers – and it holds as much weight as ever today, since no one is sure where rates may trend next.
The main conundrum facing today’s borrower is that fixed mortgage rates have been stagnant, stuck above the 4 per cent mark since mid-March. No one is particularly keen to lock in to an elevated rate for the long term, especially since five-year fixed options were available at the start of the year in the upper 3-per-cent range.
Variable mortgage rates – currently at 3.35 per cent – remain the cheapest in Canada, and have been steadily gaining market share. According to Ratehub’s internal data, five-year variable terms made up 39 per cent of borrower inquiries in May, up from 25 per cent in January.
Taking out a variable rate right now can make a lot of financial sense for risk-tolerant borrowers – but there are plenty of factors that could push these rates higher by the end of 2026.
The reality for anyone choosing a mortgage rate today is that it’s hard to make an educated guess about which rate type will save them the most by the end of their term.
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The pricing paths for both fixed and variable rates remain at the whim of some pretty volatile market factors. The war in Iran is one of the largest influences. Spiking oil prices after the closing of the Strait of Hormuz in February have reheated inflation concerns. That’s kept the Bank of Canada firmly on the sidelines in terms of its variable rate decisions. It’s also propped up the five-year Government of Canada bond yield, which lenders use as a gauge when pricing fixed mortgage rates.
This key yield has stubbornly hovered in the 3 per cent range since the start of the war, and it has remained there over the past week even as ceasefire talks between Iran and the United States have progressed and oil prices have eased. It’s clear that bond investors think inflation risk is sticking around. Until this changes, we won’t see any meaningful drop in yields and fixed mortgage rates.
A Royal Bank of Canada report published this week (by economists Frances Donald, Carrie Freestone, Mike Reid and Imri Haggin) states that even though oil prices have cooled back down to around US$75 a barrel, the upward effect on inflation will last until February, 2027.
This lingering inflation risk will likely keep yields elevated, and it also diminishes any chance of central bank rate cuts – north or south of the border.
So, what can borrowers do when the rate path is murky? For those who don’t want to roll the dice on variable, taking out a shorter fixed-rate mortgage, such as a three-year term, can be the way to go. This provides a middle ground in terms of payment stability, and it offers the ability to make a change two years sooner, on the hope that rates have dropped by then.
Lenders know that borrowers are looking for this flexibility and have priced their shorter terms to be competitive. Right now, the lowest three-year term in Canada matches that of the lowest five-year, at 4.04 per cent.
Taking out a variable rate could save you a considerable amount in the short term. Just be prepared to break or convert the mortgage early if inflation indeed forces central banks to hike rates.
What do you want to know about mortgages?
Do you have a mortgage question for our expert? Is a variable or fixed rate the best option? Does it make financial sense to refinance? Is it better to consult your bank or go to a mortgage broker?
Submit your questions below and Ratehub's Penelope Graham could answer it in an upcoming column.
Penelope Graham is the head of content at Ratehub.ca
