It’s springtime and we’re anticipating a robust housing market. Deciding which mortgage is as complex as ever, especially since there is uncertainty regarding when we’ll see our highly anticipated rate cuts.

From fixed-rate mortgages offering stability to variable-rate options with potential savings to the availability of hybrid mortgages and cash-back incentives, choosing the right mortgage is not easy. Beyond these primary decisions lie many other factors like understanding pre-payment penalties and why mortgage features are so important, making it difficult to choose the right mortgage for long-term homeownership success. Let’s look at the key decisions that need to be made.

Fixed Rate Mortgage

Opting for a fixed-rate mortgage provides total stability for the mortgage term. With a fixed interest rate, borrowers benefit from consistent monthly mortgage payments, shielding them from potential market fluctuations. This type of mortgage is particularly well-suited to individuals who prioritize financial certainty and prefer to plan their long-term budget with confidence. First-time homebuyers often find comfort in the protection against rising rates and the steady nature of fixed-rate mortgages, making it easier to manage their finances over the life of the mortgage.

But what term should you take this spring? Before and during the COVID-19 pandemic, the 5-year fixed mortgage was the term of choice. After the pandemic, we dealt with record-high inflation, causing fixed rates to spike. We don’t know when, but we do know that rates will eventually trend lower, so for many, it doesn’t make sense to lock in for 5 years. Homebuyers and homeowners have shown a preference for the 3-year term so they can renew into a lower-rate fixed mortgage sooner. Certain homebuyers continue to take a 5-year term, but mostly because the rate is slightly lower than the 3-year so it’s easier to qualify under the stress test.

Variable or Adjustable-Rate Mortgage

With a variable rate or an adjustable-rate mortgage, the interest rates fluctuate alongside the prime lending rate, based on the Bank of Canada overnight rate. This stands in contrast to fixed-rate mortgages, where the interest rate remains constant throughout the mortgage term

Following the high-rate environment of 2023, homebuyers and homeowners are again considering this type of mortgage. Why? Economists no longer question whether the overnight rate will increase, but rather when the first cut will occur. With an adjustable-rate mortgage, when the overnight rate and prime rate decrease, mortgage payments follow suit, providing a favourable cash flow boost. For those with variable-rate mortgages, while payments do not decrease, the rate reduction means more money is allocated towards interest, accelerating your mortgage repayment. Anticipation of Bank of Canada rate cuts often leads borrowers to scrutinize adjustable-rate mortgages more closely.

Whether to take a variable or adjustable or not depends on when we can expect the Bank of Canada to start cutting the overnight rate. Before 2024, the major Banks projected up to 1.5% in rate cuts by the end of 2023. Now with macro data received since the beginning of the year, those projections have been tempered downward. It may be wise to wait until there is more surety as to when the Bank will start dropping rates before opting for an adjustable-rate mortgage and then ride the rate cuts down and enjoy your boosted cash flow.

Variable and adjustable mortgages do have a certain advantage over fixed-rate mortgages. If you anticipate needing to break your mortgage early for reasons such as separation, divorce, health issues, or job relocation, consider a variable mortgage for the lower fees. You’ll have more flexibility and lower costs if you need to exit your mortgage contract early.

Hybrid Mortgage

Considering the uncertainty surrounding future rate cuts, hybrid mortgages offer unique advantages. By combining features of both fixed-rate and adjustable-rate mortgages, borrowers can enjoy the benefits of each. With a hybrid mortgage, borrowers have the flexibility to choose what percentage of their mortgage remains fixed and what percentage becomes variable. This blending of characteristics aims to provide homeowners with a middle ground – the stability of fixed-rate payments and the potential cost savings associated with variable and adjustable mortgages.

Cash-Back Mortgage

A cash-back mortgage is where the lender provides you with a lump sum cash payment upon closing the mortgage. The cash payment can be used for various purposes, such as covering closing costs, helping with home purchases and improvements, or even paying off debt. However, it’s important to note that cash-back mortgages often come with higher interest rates and specific terms, so borrowers should understand the overall cost and implications before selecting this option.

Fixed vs Variable is Not Your Only Consideration
Other decisions that homebuyers need to consider when obtaining a mortgage this spring include:

  1. Insured vs Uninsured Mortgage: The terms “insured” and “uninsured” are used to differentiate between mortgages that require mortgage default insurance and those that do not. Insured mortgages are required when you have a down payment of less than 20% of the purchase price, and the government backs the mortgage through CMHC or private insurers such as Sagen and Canada Guaranty. The fee for this insurance is added to your mortgage, increasing the total amount and your mortgage payments.
    Uninsured mortgages, on the other hand, are those where the buyer has a downpayment of 20% or more, eliminating the need for mortgage default insurance. However, since the lender isn’t protected with mortgage default insurance, rates are higher than for insured mortgages.
    Insurable mortgages add another layer of complexity, qualifying for mortgage default insurance though not mandated by the government. Lenders pay for this insurance to mitigate risk or securitize mortgages, resulting in slightly higher rates than insured mortgages.
  2. Amortization Period: Insured or insurable mortgages have a maximum 25-year amortization, whereas uninsured mortgages may extend to 30 or 35 years with a rate premium. This option allows for lower monthly payments, freeing up funds for other uses.
  3. Mortgage Features: The saying “the devil is in the detail” certainly applies to mortgages. Features such as prepayment privileges for accelerated mortgage repayment, portability for potential moves, and any associated fees or restrictions warrant careful examination. Watch out for ultra-low-rate mortgages or “restrictive” mortgages. The rate alone may be great, but the restrictions and fees may cost you more in the long run, especially if you break your mortgage early.
  4. Mortgage Prepayment Penalties: One of the important yet often overlooked mortgage features is the implications of prepayment penalties, particularly for fixed-rate mortgages. Be sure to consider their impact on plans to refinance or if you need to get out of the mortgage early.

As you can see, choosing a mortgage involves more than just the interest rate—it’s about selecting the features that best suit your needs and financial circumstances now and in the future.

Top-Rated Mississauga Mortgage Broker Joe Purewal is Here to Help!

To navigate this complex landscape, seek expert guidance from the best Mississauga Mortgage Broker – Joe Purewal, and his team. They will make a recommendation as to the type of mortgage and the features you need based on a complete review of your situation. With their expertise, you can gain clarity and confidence in your mortgage decision, paving the way toward your ideal mortgage solution and homeownership goals.