HELOC vs. fixed rate vs. variable rate
Interest rates have gone up a great deal. We all know that. Where they go from here, we don’t know, but I certainly have a point of view. But the tough question to face is what to do with your mortgage, especially if it is now coming up for renewal?
Over the years, variable-rate mortgages have generally provided a better return than fixed-rate mortgages. One study by Moshe Milevsky, a professor of finance at York University in Toronto, found that Canadian homeowners would have been better off with a variable mortgage almost 90 per cent of the time between 1950 and 2000.
My view is that the financial research shows that variable-rate mortgages are usually a better financial decision, and I believe we are in a period prior to falling rates. The Big 6 banks agree. Their year-end 2024 target for the bank rate is 0.75 to 1.5 percentage points lower than it is today. I believe the Bank of Canada will likely be lowering rates meaningfully during 2024. Based on this, I would suggest those with some willingness to take risks look at a variable-rate option today.
If I had to guess, you might see a four-year mortgage at maybe 4.8 per cent a year from now. Keep in mind that five-year rates have gone up more than 3.5 percentage points in the past two years. Do we really think it is unrealistic to see a four-year mortgage rate drop 1.3 points over the next year? Ultimately, what matters is your risk tolerance and your view on interest rates. If I was going into a fixed-rate mortgage, I might consider doing a one year and then locking in for longer a year from now. Of course, if I was doing a fixed-rate mortgage, it would largely be to avoid volatility and in that case, I might just lock in for five years.
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