If you’ve been shopping for a variable mortgage rate in Canada recently, you may have noticed something: the once-generous discounts off prime are shrinking. A few months ago, you could land a rate as low as prime minus 1.35%. Now, prime minus 1.15% is about as good as it gets(in some cases). So, why are these discounts getting smaller?
Plus, you’ve probably noticed banks pushing 3-year fixed rates hard lately. These look tempting, but there’s more beneath the surface. Let’s dive into what’s going on.
Why Are Variable Rate Discounts Shrinking?
- Market Expectations Are Changing
There’s a growing sense that interest rates might start falling soon. If rates do come down, lenders don’t want to be stuck offering steep discounts that cut into their profits. By shrinking the discounts now, they’re protecting their margins in case rates drop in the future. - Managing Risk
Offering a big discount on a variable mortgage is a risk for lenders, especially when the economic outlook is uncertain. If rates fall faster than expected, lenders could be stuck with lower returns on those discounted mortgages. By trimming the discount, they reduce their exposure to that risk. - Protecting Profit Margins
With smaller discounts, lenders are ensuring they maintain decent profits, even if the Bank of Canada lowers its rates. While you, as a borrower, might see a smaller discount now, lenders are keeping their profits steady in anticipation of a rate drop.
Why Are Banks Pushing 3-Year Fixed Rates?
At the same time, you’ve probably seen a big push from banks offering really attractive 3-year fixed rates. While these rates might look like a sweet deal, there’s more to consider before locking in.
- Large Discounts Off Posted Rates
The 3-year fixed rates being offered are often deeply discounted from the posted rate. At first glance, this seems like a great thing—you’re getting a fantastic deal! But this discount can turn into a major problem if you need to break your mortgage before the end of the term. - Potentially Huge Prepayment Penalties
Here’s the catch: if you break a fixed mortgage early, your prepayment penalty is typically based on the difference between your contract rate and the posted rate. The bigger the discount, the larger the penalty. So, while the 3-year fixed rate looks enticing now, the penalty for breaking it could be enormous. This is something to keep in mind if there’s any chance you might need to sell, move, or refinance during the term.
Banks know that many homeowners don’t stay in their mortgages for the entire term, so those tempting low rates come with a hidden risk of hefty penalties.
Why Locking in a Variable Rate Now Might Be a Smart Move
With variable rate discounts shrinking, it could be a good time to lock in a deal now for your purchase/renewal before those discounts get even smaller. Here’s why:
- Secure a Discount Before It Shrinks Further
As lenders get more cautious about offering big discounts, it’s likely that the “prime minus” deals will continue to shrink. By locking in a variable rate now, you could secure one of the better discounts available before they become even less attractive. Even if rates go down, having a larger discount off prime could mean more savings over the life of the mortgage. - Flexibility if Rates Drop
If the Bank of Canada starts lowering interest rates, you’ll benefit directly with a variable mortgage. And if you’ve secured a solid discount off prime, you’ll enjoy even greater savings as your rate adjusts downward with each cut. - Smaller Penalties Compared to Fixed Mortgages
If you need to break your mortgage early, the penalties for a variable mortgage are usually much lower than for a fixed-rate mortgage. This gives you more flexibility and less risk if life circumstances change, like needing to move or refinance.
Final Thoughts
Mortgage trends are shifting, and with variable rate discounts shrinking and banks pushing 3-year fixed rates, it’s important to weigh your options carefully. While a 3-year fixed rate might look appealing, be aware of the potentially hefty prepayment penalties if you break your mortgage early. On the other hand, locking in a variable rate now could be a smart move to secure a good discount before those prime-minus deals shrink further. Whether you go fixed or variable, make sure you consider both the short- and long-term costs involved.
