Canadian mortgages enter bizarro market where fixed-rates are cheaper than variable

By: Jessica Mach on July 26, 2019

Call it a symptom of the Mercury retrograde: you can now get a lower interest rate for a fixed-rate mortgage than you can for a variable-rate mortgage.

On LowestRates.ca, the best deal for a closed, fixed-rate mortgage with a five-year term was 2.41% on Friday morning. That’s compared to 2.64% for a closed, variable-rate mortgage with a five-year term.

This is not how mortgages typically work. Fixed-rate mortgages have historically been the more expensive option because they offer more stability to the homebuyer: the interest rate that you’re offered when you first buy the mortgage doesn’t change over the course of the mortgage term.

Variable-rate mortgages, in contrast, are typically cheaper because they don’t offer the same stability. Over the course of the mortgage term, the interest rate is subject to change depending on the whims of the market. A homebuyer with this type of mortgage is taking a risk.

When fixed-rate mortgages are cheaper than the variable option, this is great news for consumers: the better deal is now also the more stable one.

What it means for the economy-at-large, though, is a bit more complicated. Just as variable rates are directly impacted by the Bank of Canada’s overnight interest rate, fixed rates are determined in large part by the bond market.

Bonds, which are essentially loans investors can make to the government or a company, are usually more rewarding in the long-term than they are in the short-term. That means the longer you’re willing to invest your money, the more income you can expect to make.

Recently, however, short-term bond investments have been yielding more money than long-term investments. This results in what economists call an “inverted yield curve,” and happens when investors believe that the economy is slowing down or even entering a recession.

While economists largely believe that the Canadian economy is in a decent place right now, the same can’t be said for the U.S. economy, which seems to be slowing down. The Federal Reserve, which is the U.S. equivalent of the Bank of Canada, is widely expected to slash interest rates on Jul. 31 to encourage consumer spending.

So, should you switch over to a fixed rate? The current deal is undeniably a good one, especially if you’re concerned you might not be able to make payments if interest rates begin to rise again. If you’re already locked into another kind of mortgage, though, remember to check what the penalty is for breaking your current deal.