3 Reasons Why Now Is Not the Time to Lock into a Fixed Rate

May 31, 2022

Key points:

  • Now is not a good time to lock into a fixed rate mortgage. Global uncertainty impacts fixed rates, which right now are high due to the amount of risk and stress we are seeing worldwide.
  • Variable rates are much lower than fixed rates right now.
  • We are likely to see a recession in the coming years, which will lower variable rates and cause fixed rate holders to be paying much more than their variable counterparts.

Now is not the time to take a fixed rate

In this video, I want to address the importance of sticking with a variable rate in today’s market and economic climate. We will chat about the risks of locking into a fixed rate today, including how it will cost you more money and pose more risks to you as a borrower.

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:00] Today we are going to discuss three reasons why now is not the time to lock into a fixed rate mortgage. Let’s go.

Global uncertainty is high

Chris: [00:00:18] Reason number one is that fixed rate mortgages are priced relative to government bond yields. And government bond yields are a reflection of investor attitudes of where they anticipate the economy is going to go, specifically looking at factors such as inflation and policy interest rates, a.k.a. the Government of Canada prime rate or the overnight lending rate that affects the prime rate that Canadians pay. And the issue with selecting a fixed rate mortgage today is that there is a tremendous amount of uncertainty, both geopolitical and surrounding the pandemic, maybe not here in North America, but other places of the world. It’s still a concern. And so therefore, there is a very high risk premium being added to bond yields, which is therefore reflected in fixed rate mortgages. So if you take a fixed rate mortgage today, you are accepting all of that uncertainty, all of that risk in your interest rate of where things might go, not necessarily a reflection of where things are today.

Variable rates are much lower than fixed rates

Chris: [00:01:35] Reason number two is that the discount on variable rate mortgages is still too large to ignore. At the time of recording this video, the difference between five year fixed and five year variable in the market is about a one and one half percent delta, which is a huge gap. So therefore you’re saving yourself one and a half percent in a variable rate mortgage versus a comparable fixed rate option. Now, in the same breath, we also have to acknowledge that there is an expectation that the Bank of Canada will continue to raise interest rates. But with a one and one half percent difference, that is a very healthy spread to justify choosing variable over fixed.

A recession is on the horizon

Chris: [00:02:24] The third reason for not selecting a fixed rate mortgage today is that we are anticipating a recession in the coming years. There is a growing chorus of observers and economists who are starting to price in and anticipate a recession in 2023 to 2024. And what happens when we have a recession is that the trend of interest rates will reverse. So we’ll see rates peak and then come back down as the economy becomes anemic and stops growing and goes into a decline, the way that governments kick start the economy again is by lowering interest rates. So if you lock into a five year fixed today, you are paying all that premium for future uncertainty. And there is a very real possibility that within the next five years there will be a recession or an event that will trigger a lowering of interest rates. You don’t want to be locked in up here and having FOMO, watching those down here, locking in rates at at low levels because the expense or cost to break a fixed rate mortgage to refinance in a in a declining interest rate market are just too high because the lenders charge something called an interest rate differential penalty, which basically eliminates any benefit or any incentive to refinance at a lower rate.

Need more help or information?

Chris: [00:04:03] My name is Chris Molder. I am a Toronto mortgage broker. If you found this video helpful, please feel free to share it. If you have any questions about your unique circumstances, I am just a phone call or an email away. Till next time. Bye for now.

You can book a call directly into my calendar below, or get in touch with me here.