When securing a mortgage in British Columbia or anywhere in Canada, one of the biggest decisions homebuyers face is whether to choose a fixed or variable interest rate. Each option has its own set of advantages and risks, depending on market conditions and your financial situation. Speak with one of our Kelowna Real Estate Experts if you are looking to purchase property in the near future.
1) Fixed Rates vs. Variable Rates
- Fixed Mortgage Rates: With a fixed-rate mortgage, the interest rate is locked in for the entire term, usually between 1 to 5 years. This means your monthly mortgage payments remain consistent, providing peace of mind knowing that fluctuations in market interest rates won’t affect your payments.
- Pros: Stability and predictability in monthly payments.
- Cons: Fixed rates tend to be higher than variable rates at the outset. If market rates drop, you won’t benefit unless you refinance.
- Variable Mortgage Rates: A variable-rate mortgage, on the other hand, fluctuates with the Bank of Canada's prime rate. Your interest rate can change periodically, causing your mortgage payment to vary over time.
- Pros: Typically lower rates than fixed mortgages during the initial period, offering potential savings if interest rates remain stable or decrease.
- Cons: Payments can increase significantly if the prime rate rises, making it harder to budget in the long term.
2) How Does the Bank of Canada Prime Rate Affect Mortgage Rates?
The Bank of Canada prime rate is a critical factor influencing both variable and fixed mortgage rates, albeit in different ways.
- Variable Rates: These are directly tied to the prime rate. When the Bank of Canada adjusts the prime rate, variable mortgage rates change accordingly. For example, if the prime rate rises, your variable mortgage interest rate will likely increase, raising your monthly payments.
- Fixed Rates: Although fixed rates are not directly linked to the prime rate, changes in the prime rate can still affect them. The prime rate influences economic factors like inflation, which impacts the demand for long-term bonds and, in turn, fixed-rate mortgages (more on this below).
3) Are Fixed Rates Related to Bond Yields?
Yes, fixed mortgage rates are closely tied to Canadian government bond yields, especially the 5-year bond. Here's how it works:
- Mortgage lenders often set fixed mortgage rates based on the yield (interest paid) on government bonds. When bond yields rise, lenders increase fixed mortgage rates to maintain their profit margins.
- Bond yields, in turn, are influenced by factors such as inflation, market demand for bonds, and economic outlook. When the economy is expected to grow, inflation pressures increase, leading to higher bond yields and thus higher fixed mortgage rates.
- Conversely, in times of economic uncertainty or low inflation, bond yields drop, resulting in lower fixed mortgage rates.
4) What Are the Monthly Savings per $100,000 on a Mortgage?
Mortgage payments can vary significantly based on the interest rate and amortization period. Let’s take an example for rough monthly savings on each $100,000 increment of mortgage:
- At a 3% fixed interest rate over a 25-year amortization, the monthly payment on a $100,000 mortgage would be approximately $474.
- At a 5% fixed interest rate, the monthly payment would be about $581.
So, each 2% increase in interest rate adds roughly $107 per month for each $100,000 borrowed. Over a larger mortgage of $500,000, the difference in monthly payments between a 3% and a 5% interest rate would be about $535. That’s why locking in a lower interest rate can result in significant long-term savings.
5) Is This a Good Time to Purchase Property in BC?
The decision to buy property in British Columbia depends on various factors, including interest rates, property prices, and market conditions. Here's what to consider:
- Current Market Conditions: BC’s real estate market has seen fluctuations in recent years, with certain areas, like Vancouver and Kelowna, continuing to experience generally strong demand compared the the rest of the country. While prices have come down and leveled off in some areas, the long-term outlook remains positive, especially in desirable locations.
- Interest Rates: As of 2024, mortgage interest rates are higher than they were in previous years, largely due to inflation-fighting measures by the Bank of Canada. Higher rates mean higher monthly payments, but property prices in some areas may have softened, potentially creating opportunities for buyers. The Bank of Canada has started to drop their rates and as of today, we are at 2 year interest rate lows.
- Future Projections: If you anticipate that interest rates might stabilize or drop in the near future, locking in a variable rate mortgage could be advantageous. However, if rates continue to rise, a fixed-rate mortgage could protect you from future increases. Currently rates are in a downward trend so a variable rate might be wise, at least till the Spring of 2025 and then fixing your rate might make sense.
- Affordability: While mortgage rates may impact your decision, the local property market dynamics and your own financial readiness are equally crucial. If you have found a property that suits your needs and can afford the higher payments, it could still be a good time to buy, especially given the limited inventory in hot markets like Vancouver and Kelowna. Currently there is a lot of inventory available to choose from in Kelowna and the market seems to be bottoming out.
Conclusion
Choosing between fixed and variable mortgage rates ultimately comes down to your risk tolerance and financial goals. With the Bank of Canada's prime rate influencing variable rates and bond yields affecting fixed rates, understanding these mechanisms can help you make an informed decision. Whether now is a good time to buy in BC depends on both market conditions and personal readiness, but staying informed on interest rates and financial trends will position you for success in the property market.
This article is meant simply as general information purposes and not professional advice.
Speak with your local real estate professional for proper advice.
