A person in a suit holding up a white board with the words fixed variable written on it

Is Variable Mortgage A Good Choice In 2024?

Since July 2023, the Bank of Canada has not increased or decreased interest rates. Considering this stabilization, many are debating whether it’s time to get a variable mortgage and hope that the rate drops down in the next couple years. If you are considering a property investment in the next few months, here’s some information that’ll help you make the right choice for you. 

Why choose a variable mortgage? 

1. Potential for Savings

Variable-rate mortgages are directly tied to the prime rate, which means when the prime rate falls, so do the interest payments for those holding a variable mortgage. If the market rate is expected to decline in the next few years, you’ll likely save in the long run. For example, if rates drop by up to 2% in the coming years, homeowners could save thousands of dollars in interest payments, potentially up to $12,000 over five years. 

2. Flexibility and Lower Penalties

Many lenders allow homeowners to switch to a fixed-rate mortgage without incurring penalties, which works as a safety net if rates were to increase like they did in 2022.  providing a safety net if the economic landscape shifts unexpectedly. Even if you want to break your mortgage in the mid-term penalties for a variable-rate mortgage are typically much lower than those for a fixed-rate mortgage.

3. Faster Amortization

For those with adjusting-payment variable mortgages, each drop in the interest rate not only reduces the monthly payment but can also shorten the amortization period. You can make larger payments towards the principal and save a few thousand by the end of your 25 or 30 amortization period. 

"fixed-rate mortgage" written on a writing pad with a pen, house cut out and cash on the table

Why should you not choose a variable mortgage?

1. Uncertainty and Risks

While rates are expected to fall in the second half of 2024, there are no guarantees. We’ve read enough stories about how people are paying double in monthly mortgage payments because they got a variable rate mortgage when the prime rate was around 2-3%. If inflation remains stubbornly high, the Bank of Canada may pause or reverse its rate-cutting strategy, which means you will experience the same increase in the next couple years. 

2. Psychological Stress

The possibility of mortgage rates fluctuating is a sufficient source of stress and anxiety. This is something that doesn’t happen when you lock in a fixed rate even if it’s currently higher than variable mortgage rates. 

3. Fixed Rates Are Also Lowering

It’s important to note that fixed mortgage rates have also been decreasing from their peak in October 2023. For those wary of the variable-rate market’s volatility, locking in a lower fixed rate now could provide both savings and stability, which is almost like a generous sacrifice to stay afloat in rising living costs.

Making the right choice for you 

If you are a first-time home buyer, go for a fixed mortgage. When your mortgage is up for renewal, you can assess market conditions and if rates are low, you can switch to a variable mortgage. If you are an investor who is likely to sell the property in less than a couple of years, you may dare to take the variable mortgage risk. Regardless of the direction chosen, consult with an experienced mortgage professional in Kingston who can assess your current finances and offer you a plan in your best interests. Leo Ragusa is here to help you get started! Get in touch today.