Interest Rates in Canada: Understanding Variable vs. Fixed Rate Mortgages

If you are planning to buy or sell a home in St. Paul or Bonnyville, Alberta, understanding variable vs fixed rate mortgages in Canada on total premiums is critical. With interest rates changing frequently, it can take time to determine which type of mortgage is right for you.

Over the past year and a half, the Bank of Canada has made several significant changes to its key interest rate. This has a direct impact on mortgage rates across the country. 

Starting in September 2021, the bank began increasing the key interest rate from 0.25% to 4.50% as of January 25, 2023. This represents a significant increase in a short amount of time, with the bank raising the rate by a total of 4.25% since September 2021. Prior to this recent shift, the key interest rate had remained at 0.25% since March 2020 due to the economic impact of the COVID-19 pandemic.

As a result of these interest rate changes, borrowers across Canada have experienced higher mortgage rates and, consequently, higher monthly payments. Those who are currently shopping for a mortgage should keep in mind that rates are subject to change and may continue to rise or fall depending on economic conditions.

It’s important to work closely with a mortgage broker or lender to stay up to date on the latest mortgage rates and ensure that you are getting the best possible deal.

This guide will explore the differences between variable vs fixed-rate mortgages in Canada and their impact on monthly payments. We will also discuss the factors influencing interest rates, setting them, and the best ways to shop for rates.

Changes in Interest Rates From March 2021 to Now

Interest rates play a crucial role in the Canadian economy, affecting the mortgage market, consumer spending, and business investments. Since the onset of the COVID-19 pandemic, the Bank of Canada has kept the overnight rate at a historic low of 0.25% to support the economy’s recovery.

However, with the vaccination roll-out, improving economic conditions, and the potential for rising inflation, the Bank of Canada has hinted at gradually raising interest rates in the coming years.

Changes in interest rates from March 2021 to now have been significant, with fluctuations impacting both variable and fixed-rate mortgages. This is extremely important to watch as it impacts mortgage rates across the board, whether it’s a brand spanking new mortgage or if you’re renewing.

Here is a detailed description of the changes:

1. Bank of Canada Overnight Rate

• March 2021: 0.25%
• The current rate (as of February 2023): 4.5%
• Increase of 4.75%

2. Prime Rate

• March 2021: 2.45%
• The current rate (as of February 2023): 6.7%
• Increase of 4.25%

3. Five-year Fixed Mortgage Rate

• March 2021: 3.44%
• The current rate (as of February 2023): is 5.86%
• Increase of 2.42%.

Here are some observations about these changes:

• The Bank of Canada has raised its overnight rate, which has a cascading effect on other rates, such as prime and mortgage rates.
• Both fixed and variable rates have increased, but the fixed rate has increased more than the variable rate.
• Homebuyers in Canada who chose a variable vs fixed rate mortgages at the time of low rates in March 2021 may be feeling the impact of the increased rates more than those who chose fixed-rate mortgages.
• These changes in interest rates indicate an overall trend of increasing rates, which may continue in the future. 

How Do Mortgage Payments for a $600,000 Mortgage Compare?

When it comes to mortgages, it’s crucial to consider both the interest rates and fees to determine the total cost of the loan over time. To compare different mortgage options, you can examine their monthly payments. 

For instance, if you’re seeking a $600,000 mortgage with a 20% down payment, the loan amount would be $480,000. 

It’s worth noting that CMHC, Sagen & Canada Guaranty, which requires only a 5% down payment on the first $500,000 of a mortgage amount and 10% down payment on any further amount between $500,000 – $999,999, could also be a viable option as you would require a down payment of only $35,000 on a $600k mortgage . 

We’ve compiled a detailed comparison of different mortgage options :

Loan Type	Interest Rate	Monthly Payment (20% down)	Monthly Payment (Insured/CMHC)
Fixed-Rate Mortgage	2.5%	$1,905.31	$2,265.91
Fixed-Rate Mortgage	3.5%	$2,185.85	$2,603.89
Fixed-Rate Mortgage	4.5%	$2,475.39	$2,946.45
Variable Rate Mortgage	1.5%	$1,822.58	$2,189.45
Variable Rate Mortgage	2.5%	$1,972.04	$2,397.95
Variable Rate Mortgage	3.5%	$2,123.80	$2,609.28

Note that the monthly payments are calculated based on a 25-year amortization period, with the principal amount being $480,000 for the 20% down payment option, and $565,000 for the 5% down payment option (which would require mortgage insurance through CMHC).

It’s worth noting that the interest rates and monthly payments listed in the table are for illustrative purposes only, and actual rates and payments may vary depending on a variety of factors, including the borrower’s credit score, income, and debt-to-income ratio. It’s always a good idea to shop around and compare rates and terms from multiple lenders to find the best mortgage for your individual needs and circumstances.

How Variable vs Fixed Rate Mortgages in Canada Comparison Plays Out in the Alberta Market 

When considering a mortgage in Alberta, particularly in St. Paul and Bonnyville markets, it is essential to compare the total cost of the loan over time, including interest rates and fees. Fixed-rate mortgages (FRMs) are prevalent in Alberta as they offer predictability and stability in monthly payments.

For example, at an interest rate of 2.5% over 25 years, the monthly payment for a $600k mortgage with 20% down payment would be $1,803.91, while with only 5.8% down payment under CMHC program, the monthly payment would be $2,520.80. At an interest rate of 3.5% over 25 years, the monthly payment with 20% down payment would be $2,021.60, and with only 5.8% down payment under CMHC program, the monthly payment would be $2,819.77. At an interest rate of 4.5% over 25 years, the monthly payment with 20% down payment would be $2,283.62, and with only 5.8% down payment under CMHC program, the monthly payment would be $3,198.46.

Variable rate mortgages (VRMs) offer more flexibility but have fluctuating interest rates that can affect monthly payments over time. At an initial interest rate of 1.5% over 25 years, the monthly payment for a $600k mortgage with 20% down payment would be $1,579.20, while with only 5.8% down payment under CMHC program, the monthly payment would be $2,225.73. At an initial interest rate of 2.5% over 25 years, the monthly payment with 20% down payment would be $1,834.90, and with only 5.8% down payment under CMHC program, the monthly payment would be $2,583.79.

How Interest Rates in Canada Are Set

The Bank of Canada is critical in setting interest rates in Canada. The central bank manages the country’s monetary policy and ensures that inflation remains within its 1-3% target range.

The Role of the Bank of Canada in Setting Interest Rates

• The Bank of Canada meets eight times a year to review and adjust the target for the overnight rate, which is the interest rate that financial institutions use to borrow and lend money overnight.
• The bank can adjust the overnight rate to influence financial institutions’ borrowing and lending behaviour, affecting the borrowing costs for individuals and businesses.
• The bank also uses other tools, such as quantitative easing, to adjust interest rates and maintain a stable and sustainable economic environment.

Factors that influence interest rates

• Inflation: The inflation rate significantly impacts interest rates, as higher inflation rates can lead to higher interest rates to curb spending and stabilize the economy.
• Economic Growth: Economic growth also affects interest rates, as more robust growth can lead to higher interest rates to prevent the economy from overheating.
• Market Conditions: Market conditions, including supply and demand for loans, influence interest rates, as higher demand can lead to higher rates.

The Significance of the Prime Rate and its Impact on Mortgage Rates

The prime rate is the interest rate banks charge their most creditworthy customers. It is based on the overnight rate set by the Bank of Canada. Changes in the prime rate affect mortgage rates and other lending rates, such as credit cards and personal loans.

When the prime rate goes up, mortgage rates tend to follow suit, increasing the cost of borrowing for home buyers. Conversely, when the prime rate goes down, mortgage rates tend to drop, making borrowing money for a home more affordable.

Variable Rate Mortgages (VRMs)

Variable rate mortgages (VRMs) are a type of mortgage in which the interest rate fluctuates over time based on changes in the prime lending rate, which the Bank of Canada sets. So, how does it work?

When a borrower first takes out a VRM, the interest rate is typically lower than the interest rate on a fixed-rate mortgage. The lower rate makes the mortgage more affordable and appealing to many homebuyers.

Unlike fixed-rate mortgages, which maintain the same interest rate throughout the mortgage term, VRMs have an interest rate that can change over time. 

When the prime lending rate goes up or down, the interest rate on a VRM will also change. As a result, the monthly mortgage payments will either increase or decrease.

Advantages of VRMs

• Lower initial interest rates: VRMs typically have a lower initial interest rate than fixed-rate mortgages, which can result in lower monthly payments.
• Flexible payment options: Most VRMs allow homebuyers to make additional payments or pay off the mortgage early without incurring penalties, which can help reduce the overall cost of the mortgage.
• Opportunity for lower payments if interest rates go down: As the name suggests, VRMs have an interest rate that can fluctuate based on market conditions. If interest rates decrease, homeowners with VRMs could benefit from lower monthly payments.

Disadvantages of VRMs

Variable Rate Mortgages (VRMs) offer some advantages but also come with a few drawbacks. Here are some potential downsides of choosing a VRM:

• Uncertainty about future monthly payments: With a VRM, your interest rate can change over the term of your mortgage, leading to uncertainty about your future monthly payments.
• Potential for higher payments if interest rates go up: While VRMs typically start with lower interest rates, there is always the risk that interest rates could rise.

Fixed Rate Mortgages (FRMs)

Fixed Rate Mortgages (FRMs) are a type of home loan with an interest rate that remains the same for the entire term of the loan. Monthly mortgage payments are fixed and predictable throughout the life of the loan. Here are how FRMs work:

• FRMs have a fixed interest rate, which means that the interest rate does not change over the life of the loan.
• Fixed-rate mortgages (FRMs) are available in Canada with a variety of term lengths, typically ranging from 6 months to 10 years. The most common FRM term lengths are 1 year, 2 years, 3 years, 4 years, and 5 years. However, some lenders also offer 7- and 10-year FRM terms.
• The monthly payments are determined based on the amount borrowed, the interest rate, and the loan term.
• The interest rate for FRMs is typically higher than for VRMs because it provides the borrower with the security of a fixed interest rate.

Advantages of FRMs

• Predictable monthly payments, making it easier to budget for and plan for the future.
• Protection against rising interest rates: If interest rates rise, the borrower’s payments remain the same, providing security.
• Peace of mind knowing the interest rate and payment schedule.

Disadvantages of FRMs

• Higher initial interest rates compared to VRMs.
• Limited flexibility to change payments
• Missed opportunity for lower payments if interest rates decrease.

Variable vs Fixed Rate Mortgages in Canada: Choosing the Right Option for You

Choosing the right mortgage option can be daunting for homebuyers, as it can significantly impact their financial future. Understand the differences between variable vs fixed rate mortgages in Canada and consider various factors before deciding. Here are some Factors to consider:

• Financial goals: Determine your financial goals, such as long-term affordability, financial security, or flexibility, and select a mortgage option that aligns with your goals.
• Risk tolerance: Assess your risk tolerance level, i.e., how comfortable you are with fluctuations in interest rates and monthly payments.
• Payment preferences: Consider your payment preferences, such as steady payments, lower initial payments, or lower total interest payments over the mortgage term.

Importance of Consulting with a Real Estate Professional

If you’re buying or selling a home, it’s crucial to consult with a real estate professional when considering your mortgage options. Here are some reasons:

• Expertise: Real estate professionals have the knowledge and experience to guide you through choosing the right mortgage option. 
• Market knowledge: Real estate professionals have an in-depth understanding of the local real estate market, including mortgage rates, housing prices, and other factors that can impact your decision. 
• Customized advice: Real estate professionals can provide personalized advice considering your financial goals, risk tolerance, and payment preferences. 

Why You Should Use Mortgage Brokers and Online Services

If you are looking for a mortgage in Bonnyville or St. Paul, using the services of a mortgage broker can be a smart choice. Here are a few reasons:

• Wide range of mortgage options: Mortgage brokers have access to a wide range of lenders, including those that may not be available to the general public. 
• Expert advice and guidance: Mortgage brokers have in-depth mortgage market knowledge. They can offer guidance on different types of mortgages, interest rates, and other essential factors to consider when choosing a mortgage.
• Negotiating power: Mortgage brokers can negotiate with lenders on behalf of their clients, which can result in better mortgage rates and terms. 

Perks and Bonuses to Consider When Choosing a Mortgage Provider

When you’re considering different mortgage options, it’s important to compare the perks and bonuses that might be available for faster repayment, lower penalties, or skip payment options. Many banks and mortgage brokers offer these types of incentives to encourage borrowers to choose their mortgage products.

For example, RBC offers a “Double-Up” program where you can double your mortgage payment, and the extra payment goes directly towards paying down the principal. This can help you save tens of thousands on interest over time and pay off your mortgage faster. 

The Lakeland Credit Union provides an option called the 20/20 pay-down option which allows you to increase your monthly payments by 20% or pay down your mortgage principle balance by 20% annually. Servus Credit Union also provides a similar option for faster repayments with increasing your payments by 20% or making 20% lump sum payments annually. 

Additionally, some banks, such as Scotiabank and TD Bank, offer prepayment options that allow you to make extra payments or pay down your mortgage faster without incurring penalties.

Another benefit that some banks offer is free banking as long as you have a mortgage with them. For instance, CIBC and Scotiabank waive monthly account fees if you have a mortgage with them, which can help save on banking costs over time.

In addition, some banks offer cash back bonuses when you take out a mortgage with them. For example, BMO offers cashback bonuses ranging from 1% to 5% of the mortgage amount when you take out a new mortgage or renew an existing one. These types of incentives can help offset some of the costs associated with taking out a mortgage, such as legal fees, appraisal fees, or home inspection fees.

Don’t Get Too Distracted by Mortgage Perks & Bonuses

It’s worth noting that the availability of these types of perks and bonuses can vary depending on the lender, the type of mortgage product, and your specific circumstances. Before choosing a mortgage product, it’s important to research the different options available to you and consider what types of incentives and bonuses are important to you. 

Don’t get locked into a more expensive agreement, simply because you were given a voice assistant speaker, cash bonus or fancy gadget for switching. Make sure it’s right for you.

A mortgage broker can help you navigate the options and find the best mortgage product for your needs.

Shop around for mortgage options beyond just the big national banks. There may be local or regional banks and credit unions that offer competitive rates and terms. 

You can find the best mortgage for your specific needs by exploring all your options.

Gain Insightful Real Estate Advice With CENTURY 21 Poirier Real Estate

Understanding how interest rates in Canada play out in the real estate sector is crucial. The differences between variable vs fixed-rate mortgages in Canada are crucial when buying or selling a home in St. Paul or Bonnyville, Alberta. 

Consider your financial situation, plans, and risk tolerance to make an informed decision that will save you money in the long run.

Consulting with a real estate professional and mortgage broker and using online services to shop for rates can help you secure the best mortgage for your needs. 

Century 21 Poirier Real Estate is committed to helping clients make informed decisions about real estate. We hope that you found this article helpful in your dream home purchasing journey. When you’re ready to narrow down your realtor,  contact us today to find out more about helping you find your dream home.