Navigating a mortgage refinance in an unpredictable economy

By Jesse Abrams
December 23, 2023

In an environment of rising rates and inflationary pressures, there are many Canadian homeowners contemplating the decision to refinance. As inflation drives up the cost of living, property values are increasing too. Refinancing presents a strategic opportunity for homeowners to potentially tap into their home’s equity, increase their amortization to decrease monthly payments or switch their mortgage to fit the current state of the market. Regardless of which option you choose, this is a long-term decision that needs to be weighed carefully against your long-term financial goals.


Fixed-rate mortgages: A predictable choice
Choosing a fixed-rate mortgage means locking in the current interest rate for the duration of your mortgage term. It’s stable, predictable and there will be no surprises when it comes to your monthly payments. For some, this can feel like a luxury given the record number of rate hikes since the start of 2020. However, there is a trade-off. While stability is a pro, this type of mortgage comes at a premium. Plus, switching to a variable rate down the line might be a challenge, and there’s always the possibility of incurring an interest rate differential (IRD) if you decide to break your mortgage. Overall, rates are much higher than they were two years ago, however, fixed rates are currently quite a bit lower than variable.

Variable-rate mortgages: A bit of a gamble
Variable rates can sometimes be tempting to homeowners because they often start lower than fixed rates. However, in the current environment, variable rates are upwards of one per cent higher than fixed rates. A major factor to consider is that variable rates change based on the Bank of Canada’s decisions. As the economy goes up and down, your rate might, too. And if you’re someone that likes to budget and plan, these rate changes can definitely throw a wrench in your monthly budget. It’s important to keep in mind that you are able to switch to a fixed rate or break the mortgage at a lower cost than a fixed – but this will depend on the terms and conditions of your mortgage contract as this could incur penalties. In the current environment, very few of our clients have been choosing a variable rate mortgage over the last six to 12 months.

Which path to choose?
With volatile inflation and increasing rates, many Canadians’ mortgage payments have skyrocketed. As a result, most are leaning toward fixed-rate mortgages for peace of mind. However, this doesn’t rule out the flexibility and potential savings that once came with variable rates as rates come down in the future.

If you value stability, especially as a first-time homebuyer or if you’re being cautious given the current situation, a fixed rate might be right for you. On the other hand, if you’re a seasoned homeowner and can navigate changing rates, a variable-rate option could be more aligned. Rate changes could even provide more opportunities to save. All that aside, the outlook for the rest of 2023 tells us that inflation isn’t going anywhere anytime soon. That’s why our team at Homewise advises homeowners to do their research, consult with professionals such as those on our team and ensure their finances can withstand all market conditions before making any decisions. We have actually seen many Canadians go for a two- and three-year fixed rate mortgage recently (rather than most who choose a five-year) as there is an expectation among most industry professionals that rates will come down over the next two years.

So, getting a full picture of your options is the best way to make a smart decision both in the short and long term.

About Jesse Abrams

Jesse Abrams is Co-Founder at Homewise, a mortgage advisory and brokerage firm based in Toronto.

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