Fixed or variable rates? That’s one tough decision virtually everyone who needs a mortgage financing solution contends with. No thanks to the volatility of variable interest rates and fixed rates that fluctuate without season. The good news, however, is that with a healthy dose of insights and an understanding of the mortgage market making that decision becomes way easier than expected. So what insights are relevant in 2019? Well. Quite a lot actually
- Fixed interest rates are dropping (and that’s opposed to predictions from earlier on in 2018)
If you have been following the market keenly, you might have caught a hang of the many expert opinions suggesting a slew of rate hikes come 2019. 2019, however, started with a twist to the cautionary tale, contrary to those hypotheses, rates have declined and are expected to continue to do so well into the New Year. Just a few weeks back the Royal Bank of Canada slashed its 5-year fixed mortgage interest rate.
It only takes an empirical look at rate controlling indices to see that this slash was long overdue. Bond yields, a key marker of mortgage rates, have been down the last couple of months. Since it is for the most part directly proportional to mortgage rates, it follows that the latter should drop as it is now doing.
- Is that a cue to bet on fixed rates? It depends on how you see it.
As it stands, fixed rate mortgages seem like an excellent idea. Especially if you take into cognizance the British Columbia Real Estate Association’s recent rate forecast which predicts a 3.64% decline in Q1 2019. That being said, predictions have a bit of uncertainty attached to them. So even though the BCREA anticipates a fixed rate hike in Q2 of 2019, it’s possible that rates may go even lower.
The possibility of this happening is however slim. As BCREA economists note, declining oil prices (which have a toll on global economic performance) and a positive federal mortgage stress test all indicate that fixed rates will continue to decline or at the very least stay flat in Q1. It is expected that these indices will correct in Q2 2019, in the process jacking fixed rates right back up. If you factor all this in, then now might be the right time to push for a fixed rate mortgage.
- Variable rates, on the other hand, are projected to rise
For fans of variable rates, it’s a tale of opposing fortunes. According to the BCREA, the bank of Canada is primed set and ready to raise its overnight target rate (the rate at which it lends money to other financial institutions) to 2.5%, up from 1.75%. This overnight target hike is expected to play out in the course of two years, from 2019 to 2020. Of course, it will precipitate a spillover effect on variable interest rates, with experts suggesting an almost similar rate hike across the same period.
Going by this metric, variable rates should be off the table, at least for now. However, it’s on record that overtime variable rate borrowers save more money than their counterparts on the other side of the divide. Then there’s the fact that most variable rate mortgages usually come with an added number of incentives. For example, most variable mortgages offer less severe penalties for pre-payment. Take all this into consideration, and suddenly variable rates start to look like an attractive option.
Is that worth sacrificing the price certainty offered by fixed interest rates? No, if you factor in the standing circumstances. Fixed rates are on the pathway to further decline (at least until Q2 2019), and current market indices bolster this hypothesis. The global economic outlook is weak, bond yield has been slow, and the overall real estate market is currently experiencing a regression. Even though analysts attribute the latter to mortgage stress test they deem particularly unfair, it will take something out of the ordinary for the Bank of Canada to raise its fixed interest rates when all this is still in the picture.
But then again the picture has never remained static. The mortgage stress test could be rescinded, changes in oil prices don’t take a day to manifest and from experience money generally flows into the bond market just as fast as exits. So, in sum, while fixed rates are the obvious way to go, it won’t hurt to hinge some of your mortgage bets on variable rates, they might just turn out to value defining when everything is said and done.