Should you choose Variable Rate in 2024?

Rate hikes are over, rate drops are coming. Will a variable rate help you save more - or sleep less?

On one side of the rate seesaw, variable rates have likely (finally) peaked. On the other, fixed rates may be cheaper than they’ve been in a while. Let’s explore the balance of savings vs. risk to help you decide. 

The Variable Choice - FOMO or JOMO 

The Bank of Canada has said interest rates are high enough now (you can roll your eyes). The wait is on for when prime rates start backing down.

So, if variable rates have peaked, home buyers and owners have a different choice to weigh this year:

• FOMO — Fear of missing out on a variable rate's 'growing' budget relief and interest savings as it declines over time. A fixed rate means watching rates drop from the sidelines.
• JOMO — Joy of missing out on any risk that a variable rate poses, while you happily lock into a great fixed rate and sleep soundly until you (ideally) renew into lowered market rates.

The thing is, many homeowners still have the jitters from the fastest variable rate rise in over 20 years. But it's worth a close look again, with the added weight of mortgage savings it could bring over your term.

Here's a reminder of variable-rate benefits. 

After the equivalent of 19 rate hikes (0.25% increments) since March 2022, the narrative has shifted back to the benefits this rate type offers during a period of declining rates:

• Instant budget relief with each variable rate drop by the Bank of Canada —if you choose an adjusting-payment variable mortgage (ARM).
• Your amortization reduced with each rate drop, helping you pay off your mortgage faster — if you have a fixed-payment variable mortgage with a big bank (VRM).
• Historically, a variable rate tends to save homeowners more over the life of a mortgage.
• Most variable-rate products allow you to lock into a fixed rate at any time, penalty-free.
• If you need to switch lenders mid-term, you'll pay less penalty than a fixed-rate mortgage.

How fast (or far) might variable rates fall? 

Right now, a 5-year variable rate is higher than most fixed-rate terms. But if prime rates are coming down — a variable rate may go lower during your term compared to a fixed rate you might lock into now or over the next few months.

Some financial experts think prime rates (which variable mortgage rates are based on) will fall by 1.0% in 2024. There’s a  prediction that prime rates might be 1.5% lower by year-end.

Regardless of how fast they do end up declining — in total, over the next couple of years, prime rates are expected to come down by at least 2.0, resting around 5.20% from a current prime rate of 7.20% (which doesn't include lender discounts). That's a total of at least 8 rate drops (0.25% increments).

If we hit a recession, variable rates will come down faster. If we rack up even higher inflation, the decline rate may be impeded or halted for a period.

Should you resist variable-rate FOMO? 

Despite the strong allure of rate drops on the horizon (exactly 'when' is still a matter of inflation behaving and markets agreeing) — a variable rate isn't for everyone. Some homebuyers and owners, especially first-timers, prefer the set-budget strategy (aka peace of mind) of a fixed rate. Set it, and forget it.

Consider your risk preference. Prime rates (directly affected by Bank of Canada rate decisions) may go up again if inflation doesn't continue to deflate, which may lead to 'rate regret' if you usually prefer the relative safety of a fixed rate.

Fixed rates have come down from their peak of October 2023, which may mean you can better handle locking into a fixed rate in the next while, making your best choice based on great term rates available (with us, thanks to our volume discount and access to several lenders).

A low short-term fixed rate may help bridge the uncertainty gap. 

Despite economists and the Bank of Canada expecting rate hikes to be over — getting inflation down to a 2% target could run into resistance from economic volatility here and abroad.

Our best rates and mortgage products may offer a budget break now, allowing time for rate drops to take hold to (hopefully) renew into lower market rates sooner.

So get your best rate, with us. 

We make it easy. We offer exceptional service, along with your best rate and the right mortgage product for your needs.

We can help with your rate decisions in 2024. Contact us today!