Fixed or varied, what is the right choice for a second mortgage?

2022 has been a strange year for the real estate market. We continue to see record sales across much of Ontario, and British Columbia and other emerging markets such as Nova Scotia, New Brunswick and Alberta are starting to spike as well. We started the year with a low-interest record rate, but with back to back updates to the overnight rate by the Bank of Canada and yet another raise due in the next couple of weeks, we are left with a question.

However hot the real estate market has been over the past few months, the time is now for those considering a second mortgage. With interest rates still low by traditional numbers, thousands of Canadians are looking at the possibility of borrowing against their home to fund renovations, pay down other debt or finally invest in that secondary property. The timing and current interest rates make this a great time to explore this option. So, if you have the ability, it is certainly worth looking into and seeing how a second mortgage can help plan your financial future.

However, when it comes to a second mortgage, many Canadians are asking the million-dollar question: is it better to lock in a fixed-rate or variable rate?

So, let’s consider a couple of things before answering this question.

Fixed Interest Rates

Fixed interest rates lock you into a specific rate for a particular time. The most common option for a fixed rate is five years, but the exact term can differ depending on the lender and your specific situation. The advantage of fixed interest rates is that they are set, so you never have to worry about them moving around as prime rates adjust.

Fixed interest rates provide borrowers with a consistent and predictable payment for the loan term. This can be great for budgeting purposes and ensures that borrowers can diversify their savings over the long term. Many fixed interest rates also allow for some large sum payments during the term so that borrowers can pay down the principal just a little more.

Fixed interest rates are an excellent idea for a few types of customers.

  • Customers who think that the prime rate will rise over their mortgage term and are looking to secure the lowest possible payment for the longest possible term.
  • Customers who do not want to worry about fluctuations in the market and want the same monthly payment over their mortgage term.
  • Customers who are looking to be able to make predictable and consistent payments over a longer-term

Variable Interest Rates

On the other side of the coin is the variable interest rate. These mortgages change as the Bank of Canada’s overnight rate changes. Generally, these rates are lower than those we see with fixed rates, but the risk is that if the interest rate spikes over the term, you could end up paying more for this style of mortgage.

Lenders saw a huge increase in clients signing up for variable mortgage rates during the pandemic as lenders offered sub 1 per cent rates. However, as we have seen increases in the overnight rate, and now another one on the horizon, many of those who looked to secure a variable rate mortgage are looking to transfer over to a fixed term.

However, variable term mortgages are still great options for those looking at the market and what could happen. Historically, people who opted for a variable term paid less interest than those who were looking to secure a fixed rate, but we also have not seen an interest rate crash as we saw in 2020 and 2021 for some time. So, there is no precedent at this point.

Variable interest rates benefits

Variable interest rates are great for customers who are looking to…

  • Take a bit of a gamble that the variable rate will continue to be lower than a fixed rate which they could have secured
  • Take a shorter-term loan or believe that the interest rate will settle and drop again in the near to medium term
  • Beat the market and test out if the COVID interest drops will match what we have seen in terms of historical trends in variable vs fixed rates

Which one is better, fixed or variable?

It will really depend on your situation, the length of your mortgage and a few other considerations. The right fit might be different from person to person when it comes down to it.

However, we are seeing some trends that may help you lean one way or another. With the rising inflation, uncertainty around the medium to long term and the continued rise of the Bank of Canada rate, the safe bet at the moment is the fixed interest rate. However, some in the industry note that the variable rate might still be a long-term winner. Either way, previous to the pandemic, the rate was around 4 per cent, while currently, we are still sub 3 per cent for many fixed lenders. So either way, you might be able to snag a great deal on either a fixed or variable rate.

At the end of the day, the best move for you is to chat with a trusted financial expert, mortgage broker or lender who can provide you with their expert advice on the situation. Every person’s exact situation is different, and these experts can help guide you through the process and ensure you find that perfect mortgage for you.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.