Fixed mortgage rates are rising. Should you consider a variable mortgage?

With some economists expecting Canada’s central bank to increase the overnight rate another four times this year, prospective borrowers may be thinking that a fixed-rate mortgage, that locks in your rate for years, may be the safer bet.

But fixed mortgage rates are also increasing.

Fixed rates attached to uninsured mortgages, those involving down payments of 20% or more, are currently hovering just above 3%. Six months ago, the average fixed mortgage rate in Canada was only 2.2%.

It’s not the kind of increase that will knock the world off its axis, but it’s still worth understanding, especially if you might be applying for a mortgage in the coming months.

More: Compare fixed mortgage rates

Why fixed mortgage rates are rising

While the Bank of Canada’s overnight rate dictates the direction variable mortgage rates move, the country’s fixed mortgage rates are determined by activity in the government bond market.

That’s because banks are major purchasers of bonds, and use the projected returns from their bond investments to cover the costs and potential losses associated with their riskier mortgage businesses.

As the yield (or return) on those bonds fluctuates, so does a bank’s ability to cover its fixed mortgage costs.

In the six months ending March 4, 2022, the yield on five-year Government of Canada bonds jumped from 0.78% to 1.46%, according to Bank of Canada data.

So banks have been raising their fixed rates to hedge against the relative instability facing their bond purchases.

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What do higher fixed rates mean for your next mortgage?

According to mortgage analyst Robert McLister, every 0.1 percentage point increase in a five-year fixed interest rate results in monthly mortgage payments rising by about five dollars for every $100,000 in mortgage debt.

With fixed rates having increased about 0.8 percentage points over the last six months, a $700,000 mortgage costs approximately $280 more a month now than it would have in September.

It’s hard to imagine the increase affecting too many current homeowners. Anyone nearing the end of a three- or five-year term will still find fixed rates lower than those they originally signed up for, and that’s if they didn’t refinance while rates were at record lows during the pandemic.

“I actually don't think most people that are in fixed rates are going to have any real pain or any problems renewing at all, unless they have had employment situations or such things that would affect a normal qualification,” says Paul Taylor, CEO of Mortgage Professionals Canada.

If a borrower was able to refinance into a five-year fixed last year, there’s no need to even think about rates until it’s time to renew in 2026.

Less buying power

Anyone in the market for a new fixed-rate mortgage, however, will have less buying power to work with. If that’s the situation you find yourself in, you have a few options.

First, if the rate you’re being offered by your lender strikes you as sub-optimal, you can always ask for a better deal. The mortgage market is brutally competitive; most lenders will be flexible on the rate if it means completing a transaction with a responsible borrower.

When negotiating, Taylor says it’s important to keep in mind that the margins lenders are earning on their loans are quite thin.

“I wouldn't get too aggressive,” he says. “But there's never any harm in taking your renewal out to the market.”