Mortgage delinquencies could continue rising

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Are short-term fixed rate mortgages the way to go?

Some 1.2 million homeowners will see “significantly higher interest rates” when their mortgages come up for renewal next year, a new report from Canada Mortgage and Housing Corporation warns.

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About 85 per cent of fixed-rate mortgages coming up for renewal were contracted when the Bank of Canada rate was at or below one per cent. The current key rate stands at 3.75 per cent. According to the report, many Canadians face challenges in managing mortgage renewals: the mortgage delinquency rate increased to 0.19 per cent by the second quarter of this year and is predicted to continue rising in 2025.

If your mortgage is coming up for renewal, you may be wondering if you should opt for a fixed or variable mortgage rate. Leah Zlatkin, licensed mortgage broker and LowestRates.ca expert, suggests switching to a fixed-rate mortgage at renewal could provide much-needed stability and budget predictability in these uncertain times.

According to the LowestRates.ca mortgage quoter, the lowest rate for a three-year insured fixed-rate mortgage is 4.19 per cent and the current lowest rate for a three-year variable is 5.05 per cent. “Borrowers with variable rates will be renewing at significantly higher rates, meaning higher monthly payments,” she says.

“If you are fortunate enough to be in a position in which higher rates for a longer period won’t significantly damage your finances, then a variable rate may make sense as further rate cuts are anticipated,” Zlatkin says. “For those with tighter finances, choosing a short-term fixed rate mortgage to bridge the uncertainty gap and wait for rate volatility to settle might make sense. Some homebuyers simply prefer the set-budget strategy that a fixed- rate mortgage offers.”

The biggest consideration when choosing between a fixed or variable mortgage rate is risk tolerance, advises Penelope Graham, mortgage expert at Ratehub.ca. “While variable mortgage rates are largely expected to trend lower through 2025, that’s not a guarantee. There are a lot of unknown economic factors, such as inflation’s progress, job growth and the economic implications of the U.S. election outcome, that could change the Bank of Canada’s rate cutting path,” she says.

If you’re considering a variable mortgage rate, that means you need to be comfortable with the possibility that rates could go on hold or even rise again at some point during your mortgage term, Graham reminds. “It’s important to have the financial bandwidth to absorb those potentially higher payments.”

Fixed mortgage rates, on the other hand, provide borrowers with stability and peace of mind that their monthly payment won’t change during the length of their mortgage term. However, they offer less flexibility. “A fixed mortgage rate will not lower in tandem with future Bank of Canada rate cuts like a variable option will,” Graham says.

“For borrowers who want to lock in but still want the option to make a change to their mortgage sooner, a shorter-term rate may be a good middle ground, as they’ll be able to switch things up at a sooner renewal rate. Those who have variable mortgage rates also usually have the option to switch to their lender’s posted fixed mortgage rate with no penalty if they change their mind during their term.”