Pick your mortgage by what will help you sleep at night, experts say

To fix your mortgage rate or not to fix? That is just one of the questions facing people looking for the best mortgage deal right now in an economy marked by the slings and arrows of inflation and climbing interest rates.

Whether it’s a new mortgage or a renewal, buyers and homeowners are filled with questions: What’s the best rate? Does locking in make sense while interest rates keep rising? If I lock in, for how long?

“There are no perfect answers,” says James Robinson, mortgage agent with Dominion Lending Centres Mortgage Watch in Toronto.

“The best rates right now are in the low to mid-range of 5 per cent for a fixed rate. Variable rates are higher, between 5.8 and 6.5 per cent at the moment,” he says.

Finding the best rate is a moving target, as key lending rates have risen sharply over the past year. The best rate also depends on the size of the mortgage, the amortization (how long it takes to pay off) and the percentage of what is being borrowed compared with the down payment, he explains.

Mr. Robinson and other mortgage experts agree that locking in for five years right now is not necessarily the best idea. “A better product right now is a three-year fixed rate,” says Steve Garganis at Mortgage Architects in Toronto.

“It’s not worth paying a premium to be in a variable. My rule of thumb is that the variable rate must be at least 0.5 per cent lower than the best fixed rate [which is not the case now], otherwise, why go into a floating rate?” he says.

Mr. Robinson and others say buyers should also consider a two-year and even a one-year fixed-rate mortgage.

“Historically, choosing a variable-rate mortgage has been better in the long run, but we’re in a weird time,” says Julie Sheremeto, broker with the Mortgage Advisors and TMA West.

“It’s most common to choose a two- or three-year or even a one-year fixed rate right now. When people choose variable it’s because they expect rates to go down, but today it’s a tough pill to swallow because those rates are higher than fixed by a wide margin,” says Ms. Sheremeto, who works with clients in Toronto, Ottawa and Kelowna.

Since March, 2022, the Bank of Canada has raised its key lending rate eight times, most recently on Jan. 25, when it boosted the rate 25 basis points, or a quarter of a percentage point, to reach 4.50 per cent. There’s a consensus among economists that the Bank will pause its rate hikes and that rates may come down in 2024, “but no one can be sure of this,” Ms. Sheremeto says.

“It’s a 50-50 chance that rates will decrease lower than the current five-year rate, but obviously there are no guarantees given the current economic environment in Canada,” says Mark Ostland, director of mobile experience at Meridian Credit Union in Owen Sound, Ont.

“The Bank of Canada has indicated that it may pause future rate hikes in 2023, but with food and energy costs increasing each month, they may rethink this,” he explains.

Mr. Robinson adds: “Not even the heads of central banks know with certainty what they will do about rates. Everyone seems to be right and wrong about their moves with equal frequency.”

Financial author and consultant Sandra Foster, who is president of Toronto-based Headspring Consulting Inc., says choosing the right mortgage rate and terms “depends a lot on what I call the ‘sleep factor.’”

As she explains it, “You may qualify for a certain rate and terms, but you still have to look at what will allow you to sleep well at night.”

“Maybe you have a car that’s going to break down soon and will need repairs, maybe there’s a baby on the way or maybe you’re planning for retirement – these are all factors that you should consider beyond just looking at a formula for which mortgage to choose,” Ms. Foster says.

Your personal budget should be the most important factor, Mr. Robinson agrees. “Trying to pick the term that will result in the lowest interest cost and a renewal date matching lower rates is very much a guess, similar to trying to time the stock market or the real estate market. It’s not easy and you can be wrong,” he says.

Even if predicting rates is akin to throwing darts while wearing a blindfold, mortgage hunters should still seek professional advice and shop around for the rates and terms that suit their circumstances best, Ms. Sheremeto says.

“Speak to a mortgage broker. It doesn’t cost you anything and you’ll find out what your options are, whether you’re looking to get preapproved or you’re renewing,” she says. “More important than rates, you want to make sure the mortgage product and terms match the type of flexibility you want with your mortgage and what your plans are.”

Ms. Sheremeto says factors to consider include: “Are you going to stay in the home for a while or move in a few years? You’ll want to know what the potential costs and penalties are for breaking your mortgage.”

Being comfortable with your choice is the most important of all, explains Ms. Foster.

“And don’t underestimate the sleep factor,” she adds. “The best mortgage is one you can afford, one you can carry and with terms that you can deal with.”

Written By: David Israelson, The Globe and Mail, March 4, 2023

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