There is a distinct difference between mortgage rate hikes. I am often asked why variable rates and fixed rates do not move at the same time.
Variable rates are adjusted by the Bank of Canada. The entire mortgage market tenses every time Mark Carney's group meet to decide whether an adjustment to the rate is required. Variable rate decisions are usually made to ensure the Canadian economy is kept in balance. If the dollar is climbing too quickly, the Bank of Canada may increase the rate to slow the climb. This move would protect our export market. If the economy is struggling, the rate will stay low to support corporate and personal borrowing to stimulate the economy. If the economy is heating up the Bank of Canada will 'tap the brakes' and keep the economy from reaching a dangerous level of rapid inflation. If you take the variable rate, you must be prepared to accept increases over time. Currently the rates are at a historic low, so the only real question is 'How long will the Bank of Canada keep the variable rates Low'? One real benefit to taking the variable mortgage is, you would not be affected by an Interest rate differential penalty. Instead, you might only be subject to the 3 month interest penalty clause for an early payout. Another benefit is that you can convert your mortgage to the fixed rate. The only drawback is that by the time you decide to convert to a fixed rate they would most likely have climbed from what was originally offered.
Fixed rates are generally tied to the bond market. Fixed rate predictions are generally tied to increasing or decreasing bond prices. If you watch the bond market you can almost guess what the senior economists are going to say about their next long term economic forecast. If long term 5-10 year bond prices are increasing, long term interest rates will also increase. Recently the fixed 3-5 year rates increased by about .5%, because the 3-5 year bond market was putting increasing pressure on the fixed mortgage prices. That being said, the 10 year rate has stayed the same, making 5.2% a very attractive option for a 10 year mortgage term. Things to watch out for... If the market slows down again and you have committed to a long term mortgage, rates might decrease again and you will be stuck for a long time with a rate higher than most. With a fixed rate mortgage you will be subjected to an Interest Rate Differential Penalty (IRD). This penalty calculates how much interest the bank is entitle to receive before the end of the agreed term. This huge penalty might even be charged if you sell your home early. So make sure your mortgage strategy matches your future plans.
So you see that while both rates are offered as mortgage rates, you are required to decide whether you would like to commit to a moving target rate of a variable mortgage or pay a slightly higher interest rate to lock in your fixed term for a longer more predictable period.
You could choose the 50/50 split mortgage where half is fixed and the other half is variable. That way you get the immediate savings of the variable and the long term security of the fixed rate.
