Fixed or variable rate mortgage? What a rising interest rate means for you.


Last updated on June 7, 2023.

Since March of 2022, the Bank of Canada has steadily raised its benchmark interest rate from 0.25% all the way up to 4.75% as of June 2023. But what does this rising interest rate mean for homeowners like you? How will it affect your financial situation? Let’s delve into the components of a mortgage, explore different mortgage structures, and understand how this interest rate hike may influence your mortgage payments1

Understanding your mortgage. 

No matter what type of mortgage you have, you’ll be making interest payments in addition to repaying the principal amount borrowed. The extent of these interest payments depends on market conditions and whether you chose a fixed or variable rate mortgage. While market influences play a role, the best choice for you ultimately depends on your unique financial circumstances and goals. With the current rising interest rate environment, it’s an opportune time to assess your finances, consider prevailing interest rates, and plan for your financial future. This is especially true if your mortgage is due for renewal. Our dedicated team of Vancity Mortgage Specialists are readily available to help you navigate the changing interest rates and gain a better understanding of fixed-rate versus variable-rate mortgage options.

Fixed rate mortgage: Stability and predictability. 

Think of a fixed-rate mortgage as the more straightforward and predictable option. It offers stability by keeping your interest rate constant throughout the mortgage term. Even if the market experiences fluctuations, your interest rate remains unaffected. For many individuals, this stability is ideal, particularly if you have a fixed budget or prefer to easily track when your mortgage will be paid off. With a fixed rate mortgage, you can depend on a steady and unchanging interest rate.

However, there’s a potential downside to consider. A fixed-rate mortgage locks you into the same interest rate until the end of your mortgage term. Consequently, even if market conditions become favorable and interest rates drop significantly, you won’t reap the benefits of contributing more towards the principal value of your home until your mortgage is up for renewal. While you can choose to renew early, this may incur expensive penalties.

Down payment dilemma

In 2023, many borrowers have opted to look at shorter-term fixed-rate mortgages rather than the standard 5-year term. This is becoming increasingly popular as homeowners are betting on the interest rates to drop over the next few years. By having a shorter-term mortgage, if interest rates do come down then they can take advantage of renewing sooner and avoid the potential penalties. However, no one has a crystal ball and interest rates dropping over the next few years is not a guarantee.

Variable rate mortgage: Riding the market wave.

The second option is known as a variable rate mortgage and offers a more nuanced approach compared to its fixed-rate counterpart. According to the Bank of Canada, variable-rate mortgages grew to about a third of all mortgage debt in Canada as of November 2022.

Variable rate mortgages also have a fixed term, but their interest rates fluctuate based on the “prime rate” or market interest rate. With this type of mortgage, you can pay the same amount every month throughout the term. However, the portion of your payment allocated to the principal versus interest depends on how the prime rate fluctuates.

While market influences play a role, the best choice for you ultimately depends on your unique financial circumstances and goals.

If the prime rate falls, your interest rate decreases, enabling you to contribute more to the principal value of your home. However, in times like these when interest rates are climbing, those with variable rate mortgages will allocate more towards interest and less towards the principal. Without regularly reviewing your finances, you might find yourself owing more at the end of your mortgage term than you initially planned.

How a rising interest rate impacts you. 

Mortgages typically involve substantial outstanding balances, which means even a slight change in interest rates can significantly affect how much you contribute towards the principal versus interest. It’s crucial to remember that every financial situation is unique and selecting the right mortgage option can help you save money and gain peace of mind. Regularly reviewing your finances to understand your options and prepare for ongoing market changes is always a prudent move.

To better understand how a rate increase could impact your monthly budget, explore the “Payment” tab on our mortgage calculator. This tool allows you to input your mortgage details and adjust the interest rates to visualize how your payments would rise.

The Vancity team is here for you. 

For personalized advice that aligns with your financial goals, book an appointment with a Vancity Mortgage Specialist. Our dedicated team is committed to supporting you, making sense of these changes, and guiding you towards a confident financial future. If you have any questions regarding fixed versus variable mortgage rates and how a rising interest rate may affect you, don’t hesitate to connect with us.

As a homeowner, the recent increase in the benchmark interest rate by the Bank of Canada has implications for your mortgage. By understanding the components of your mortgage, exploring fixed and variable rate options, and staying informed about market changes, you can make well-informed decisions to safeguard your financial well-being. Remember, the Vancity team is here to assist you every step of the way, helping you navigate the evolving landscape and empowering you to create a secure financial future.

Want to learn more about the rising interest rate environment and what it means for you? Check out our Instagram Live Q&A with Vancity’s Ryan Mckinley (Sr. Mortgage Development Manager) and Stephanie Larbalestier (Account Manager).

[1] The information provided in this post is based on Vancity products.

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