According to Canadian bond market forecasts discussed in the episode, rates are expected to be approximately 1% lower a year from now through four quarter-percentage-point cuts by the Bank of Canada. The lowest interest rates are forecasted to arrive between two to three years from now, approximately 2% below current levels.
On a $500,000 mortgage, a five-year variable rate at prime plus 0.05% offers over $10,000 in savings compared to a five-year fixed rate over the mortgage term. However, taking a two-year fixed now and then renewing into a variable for three years is approximately $6,000 worse than going variable immediately.
Surprisingly, taking a three-year fixed term today and then switching to a variable rate is mathematically equivalent to taking a five-year variable rate right away. For investors who prefer payment certainty over squeezing out every last dollar of savings, a three-year fixed offers an attractive price difference right now.
A five-year variable rate offers flexibility should you need to sell the property or want to refinance during the mortgage term, which will likely become a viable option within the next one to two years. This flexibility is particularly valuable for real estate investors managing portfolio changes.
For primary residences, the analysis shows a clean and clear sweep favoring variable rates over fixed rates in the current June 2024 environment. The numbers strongly support going variable for owner-occupied properties.
