Fixed or variable mortgages in a time of interest hikes

Tracy Head • October 24, 2022

Last weekend I attended the mortgage professionals conference in Vancouver. My goal was to take in as many professional development sessions as possible because I’m finding we are moving forward in a very strange interest rate environment.

Ironically, and I never thought I’d ever say this, the session I got the most from (and arguably enjoyed the most) was the presentation by Benjamin Tal. Tal is the managing director and deputy chief economist at CIBC Capital Markets Inc.


He spoke about his thoughts on our current rate environment, the forces driving the Bank of Canada’s economic policies, and where he felt rates will go.


He also spoke about the unprecedented rate hikes we’ve seen this year. The Bank of Canada is trying desperately to curb inflation and he thought the bank has gone too far and has overreached with the rate hikes this year.


I am a fan of variable rate mortgages. One of the key factors that influences this is the cost of breaking your mortgage early. If you need to pay your mortgage in full and it doesn’t make sense (or doesn’t work) to port your current mortgage, the maximum penalty you will be charged is three months’ interest.


With a fixed mortgage, the penalty to break your mortgage is normally the greater of either the interest rate differential (IRD) or three months’ interest. Investopedia.ca shows how an IRD penalty is calculated:


“An IRD weighs the contrast in interest rates between two similar interest-bearing assets. Most often it is the difference between two interest rates.”


This type of penalty can be substantial. I’m currently working with a client who is selling a luxury property whose current mortgage is up for renewal. It is a sizeable mortgage and he is understandably concerned about the volatility of mortgage interest rates right now.


I did the math for him. Had he locked into a five-year fixed-rate mortgage, based on where rates are now and the balance of his mortgage, his penalty was in the range of $32,000. The variable rate penalty, again based on today’s balance and rate, would be around $6,000. So for this particular client who is absolutely going to be selling his home in the next year the potential increase in payment due to rising rates was a far more palatable option than a penalty in the $32,000 range.


All this aside, for many Canadians in variable mortgages the incredible rate hikes we’ve seen this year make a massive dent in their monthly budget. It’s really tempting to think about locking into a fixed rate product for the stability of the payment.


One consideration is how you will feel if you lock into a rate in the mid to high five per cent range when rates start to move down again. Will you sleep better at night knowing you have the security of a fixed payment? Are you losing sleep thinking about where rates are going?


I recommend you think about why you chose variable in the first place. You likely enjoyed really low rates for the first part of your term and will very likely enjoy lower rates towards the end of your term as rates start to trend down again.


I guess I should have started with that. Tal’s take is that we are in for another significant rate hike very soon but he feels rates will stabilize next year and start trending down again towards the end of next year or early 2024.


One option is splitting the difference. There are lenders who offer true variable mortgages with a static payment. This means that regardless of where rates move your payment stays the same. I should say, it stays the same until the increase in rate means you aren’t paying enough to cover the interest due which in turn will affect your amortization.


You would have to pay a three-month interest penalty to break your current mortgage to switch to a lender that offers a static payment. Most lenders will allow you to capitalize up to $3,000 of your penalty into your new mortgage (more if you do a refinance instead of a straight switch, providing you have enough equity for this to work).


Going this route you will still enjoy the benefit of a variable rate mortgage once rates start moving down again, without worrying about potential penalties if you have to pay out your mortgage unexpectedly.


If you’d like to chat about this, and see if it’s a fit for you, I am happy to do a mortgage check-up and offer some insight.

Tracy Head

Mortgage Broker

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I know this is a dumb question but

By Tracy Head • May 19, 2025
I know this is a dumb question but ….  I should probably know this already …. I’m sorry to ask so many questions but …. So many times clients start out with one of these statements. They feel like they should have a better understanding of the mortgage process or terminology. The truth is that buying a home is not a simple journey. Applying for a mortgage is not a cake walk. And even if you’ve been through the process in the past the goal posts seem to move faster than you can keep up. One of the reasons I love (most days) my work is that I am able to spend as much time as I need with my clients helping them understand their financing. When I worked for one of the chartered banks in a previous life I was so tightly scheduled that when our time was up that was it. Someone else had an appointment that I needed to be on time for. Clients have different learning and communication styles. Some come well-versed and understand the mortgage process; others have not done any research and need a lot of hand-holding. My goal is to make sure that by the time they are signing their legal paperwork in front of their lawyer my clients understand the decisions they have made and the rationale behind them. Whether it is the first time you are buying a home or you are looking to refinance your current mortgage it is important that you find a professional to work with that is patient and non-judgmental. In a beautiful world you connect with someone that has bought and sold a few of their own homes and has been working in the mortgage world for a while. It can feel very intimidating to bare your soul to a complete stranger. We often don’t share details of our finances with anyone except our banker / spouse and in some cases I find clients may feel embarrassed about the state of their finances. We see via social media others living lavish lifestyles and somehow feel we should be doing the same. The bottom line is that whether this is your first plunge into the homeownership pool or you are a veteran in the market, it is so important to connect with someone that takes the time to understand your situation and your goals. Knowing your long-term plan and how you handle your finances can help your mortgage professional set you up for success. Please please please make sure you ask all of the questions, even if you think you should know that answers. Guessing that you understand something or bluffing without listening to your mortgage professional’s advice can cause unnecessary grief down the road.

Conditions of Mortgage Financing

By Tracy Head • May 5, 2025
When I work with clients that say they are writing an offer on a private sale I always talk about the benefits of working with a realtor. Realtors do so much legwork that happens behind the scenes that clients aren’t even aware of. Most times it is challenging on my end when clients try to tackle the process of writing an offer on a private sale themselves. I joke and say I am going to charge them an extra fee because of the additional work it creates on our end. I don’t actually charge a fee to be clear but I am only half kidding. When you start down the road of buying a home there are many new and unfamiliar terms you may hear. Whether you are working with a realtor or not, arguably some of the most important things you need to learn about are the “subject to” conditions to include in your offer to purchase. When you write an offer to purchase a home, your realtor will offer guidance as to the conditions you include. Common conditions you will see are:  Subject to arranging suitable financing  Subject to a satisfactory home inspection  Subject to arranging home insurance  Subject to review of strata documents  Subject to the sale of your current home If you are purchasing a rural property or are in a unique situation you may also see:  Subject to a water potability test  Subject to an inspection of the septic system  Subject to the seller finding a suitable home to purchase These lists are not all-encompassing by any means. The purpose of adding conditions to your offer is to protect you in case there are any issues with the home you are looking to purchase. In previous columns I’ve written about the potential dangers of writing a subject-free offer. The high- level, quick position is that if you write a subject-free offer you’d better have cash on hand to buy the home. I have worked with several clients over the last few months that have written private offers. We do absolutely everything ahead of time to try to ensure they will be successful with their financing. These files stress clients more than you can imagine. They have to either find templates to fill out or pay a lawyer or notary to prepare the documents for them. Either way they need to quickly learn about the conditions I listed above and understand key dates involved in the buying process. The clients need to deal directly with the sellers on any issues that may arise. When you are working with a realtor they handle these issues on your behalf. A knowledgeable realtor also helps avoid issues by taking any of the personal contact and emotions out of any potential areas of conflict. Make sure you do your due diligence and have your ducks in a row as you move forward with an offer to purchase whether writing an offer with a realtor or on your own. Now that the sun has come out and the election is over I’ve seen my clients more actively shopping which is encouraging. As always, my advice is to work with a realtor that you are comfortable with and who knows your area well.