‘The hike changes the math on renewal’: BoC hikes rate for first time in 3 years — is it time to go fixed or variable on your mortgage renewal?

Canada’s six largest banks have already raised their standard prime rates to 4.70%, effective October 29. But the hike doesn’t automatically make a fixed mortgage the better choice.

“The hike changes the math on renewal, but it shouldn’t cause panic,” Joe Jacobs of Mortgage Connection told Money.ca. Your budget, available rates and ability to manage further increases all matter too.

How the BoC rate hike affects your mortgage

Variable mortgage rates generally follow lenders’ prime rates, which tend to move when the BoC changes its policy rate.

The Big Six banks have raised prime from 4.45% to 4.70%, increasing borrowing costs for customers with prime-linked variable mortgages and home equity lines of credit (HELOCs).

Fixed mortgage rates, meanwhile, are influenced by bond yields and market expectations about inflation and future interest rates. They can move ahead of a BoC announcement, and neither type of mortgage is guaranteed to be cheaper over the full term.

When a fixed mortgage could make sense

A fixed-rate mortgage locks in your interest rate for the term, providing greater certainty about borrowing costs. That can be valuable if your budget has little room for higher payments.

“If a few more increases would break your budget, or you just need to know what your payment will be, a fixed term buys certainty,” said Jacobs.

The trade-off is that you may not benefit as quickly if rates fall. Breaking a fixed mortgage early can also trigger a substantial prepayment penalty, depending on your lender and contract.

Consider different terms rather than focusing only on a five-year fixed mortgage. A shorter term may offer a different balance of certainty and flexibility, although you’ll need to renew sooner.

When a variable mortgage could make sense

A variable rate may suit borrowers who have room in their budget to absorb further increases and are comfortable with uncertainty.

In its October 28 announcement, the BoC said inflation was expected to rise to about 3.5% by the end of 2026 and average 3% in 2027 before returning close to 2% around mid-2028. Further increases remain possible, depending on how the outlook develops.

“If you have room in your budget, expect to sell or refinance in the next few years, or want lower penalties, variable still makes sense,” Jacobs said. Breaking a variable mortgage typically costs around three months’ interest, although borrowers should check their contract.

It is also worth checking how your payments respond to rate changes. With an adjustable-rate mortgage, payments generally rise when rates increase. With a fixed-payment variable mortgage, payments may stay the same while more goes towards interest and less towards principal.

With a fixed-payment variable mortgage, your payments may stay the same as interest rates rise, leaving less money to pay down your principal. If rates rise enough to reach your mortgage’s trigger rate, your payment may no longer cover all the interest owed, and your lender may require you to increase payments or take other action under your contract.