Fixed or variable rate, now that the Bank has raised its rate?

It is the question I hear most this week, from buyers and from owners coming up on renewal alike: fixed or variable? The answer changed on October 28, when the Bank of Canada stopped cutting and started raising. Here is how I see it, numbers in hand.

What changed on October 28

The Bank of Canada raised its policy rate by 0.25% to bring it to 2.50%. That is its first hike since July 2023, after a long run of cuts. The banks' prime rate followed to 4.70%. The reason comes down to one word: inflation. It has run around 3% since the spring, and the Bank expects it to climb toward 3.5% by the end of the year.

The part that matters most for you is not the hike itself, it is what the Bank said next. It warned that it might need to go higher, while adding that it would move carefully given the uncertainty. In other words, nobody is counting on fast cuts anymore. The next decision lands December 9. This backdrop changes the math between fixed and variable, because variable moves with the Bank and fixed does not.

Right now, variable costs less

First surprise for a lot of people: variable is lower than fixed at the moment. On November 5, nesto showed a best five-year fixed insured rate of 4.59%, against 3.66% for the five-year variable insured. Almost a full point of spread, and it is variable that wins. We have not seen that often these past few years.

Let me put a number on it. On a $500,000 mortgage amortized over 25 years, the fixed at 4.59% works out to a payment of about $2,792 a month. The same loan at the 3.66% variable drops to about $2,539 a month. The gap is $254 a month, roughly $3,000 over a year. For a buyer in Longueuil or Brossard, that is the difference between a tight budget and one that can breathe.

But variable rises when the Bank rises

Here is the flip side. That 3.66% is not set in stone. It is calculated off the prime rate, and prime moves every time the Bank touches its policy rate. If the Bank raises another 0.25% on December 9, your variable payment on $500,000 climbs by about $67 a month. A second hike adds about the same again.

Let me run the math all the way out, because this is where people trip up. Even after two 0.25% hikes, the variable would sit at 4.16% and the payment near $2,674, still under the fixed at $2,792. It would take close to four hikes for the variable to catch up to today's fixed. The Bank said it would move carefully, not that it would stack hike on hike. So variable starts with a real head start, but a head start you pay for by accepting the uncertainty.

Fixed, for its part, buys peace of mind. You know your payment for five years, whatever the Bank does. You pay a bit more up front to stop thinking about it. Some clients sleep better that way, and that has real value, especially when the budget is tight.

What this means for you

• You are buying soon: if your budget has room and a few dozen extra dollars a month would not throw you into a panic, variable saves you money starting now. If you are buying at the top of your capacity, fixed protects your payment and your pre-approval from a bad surprise. Either way, lock in a rate hold as soon as your file is ready: it holds for 90 to 120 days at most lenders.
• You are renewing your mortgage: do not sign your bank's first renewal offer out of reflex. The spread between fixed and variable, and from one lender to the next, is often worth more than the hassle of shopping around. Start three to four months before maturity, not the week before.
• You invest in an income property: here, variable hits your cash flow directly, and one hike can eat into your margin. Look at your debt coverage ratio with a hike or two built in, not just at today's rate. I wrote about renewal on income properties if that is your situation.

I am not a mortgage broker, and the final call happens with yours, your bank and your own tolerance for risk. But I see every week how this choice changes what a buyer can offer and what a seller can expect from the market. I went through the hike itself in my piece on the October 28 decision. If you are thinking of buying or selling on the South Shore, let's talk about your situation before you sign anything. Request a free evaluation or write to me directly. I answer personally.