A report recently released by the Canadian Association of Accredited Mortgage Professionals (CAAMP) shows that a growing number of Canadians are choosing a variable rate mortgage over a fixed mortgage rate. In fact, 20 per cent of new homeowners in Canada chose a variable rate mortgage this year compared to 9 per cent in 2013. Looking at all outstanding mortgages in Canada, roughly a quarter (24 per cent) are variable, 69 per cent are fixed rate and 6 per cent are a combination (for instance, if you have a line of credit and a regular mortgage – combination of fixed and variable could help hedge against potential future rate hikes).
I have a variable-rate mortgage myself and many of my clients have chosen this route as well if they can qualify (it typically requires more income than a fixed rate mortgage because of the potential for higher payments). Fixed-rate mortgages typically have higher prepayment penalties than variable-rate mortgages, so a variable rate offers more flexibility if you decide to sell the property or pay it off before the end of your term. Over time, you will typically pay less in interest with a variable-rate loan, but some risk-adverse buyers prefer a fixed-rate loan because their mortgage costs remain fixed throughout their mortgage term.
Here are a few other findings from CAAMP’s report:
- More than three quarters of mortgage borrowers (78 per cent) who renewed their mortgage in the last 12 months saw a reduction in their rate. I always recommend consulting a mortgage broker at renewal time to make sure you aren’t leaving money on the table. At the very least, ask your lender if they can beat the renewal rate offered.
- Most (85 per cent) of all Canadian homeowners have 25 per cent or more equity in their homes. (Those who put down less than 20 per cent need to pay for mortgage insurance at closing.)
- Eleven per cent of Canadian homeowners took equity out of their home in the past year, with one third of those homeowners reporting they used the money for debt consolidation or repayment (It’s definitely not a good idea to use your home as an ATM machine and keep taking out equity. However, credit card debt and other unsecured debt usually carry much higher interest rates, so if you’re disciplined and avoid future debt, this could save you on interest.) The average takeout amount was $58,000.
- Overall, the data show that the average mortgage interest rate in Canada is 3.24 per cent, but for those who purchased in 2014, the average is 2.89 per cent. Nobody has a crystal ball, but I could see mortgage rates gradually inching up or remaining stable in the near future.