Fixed vs variable rates – what direction will debate take in 2022?

With rate increases on the horizon, the choice is as compelling as ever

Fixed vs variable rates – what direction will debate take in 2022?

As 2022 rolls into view, the ever-evolving tug of war between fixed and variable rate mortgages shows little sign of slowing down.

While the Bank of Canada’s recent announcement that rate hikes are on the way in the coming months indicated that the pandemic-era days of record-low rates are nearing an end, there’s still plenty of debate over what trajectory the fixed-vs-variable debate is likely to take.

Sung Lee (pictured), director, sales and underwriting at IntelliMortgage Inc. and RATESDOTCA expert, told Canadian Mortgage Professional that recent weeks had seen variable rate products begin to tick higher – not because of the prospect of changes to the Bank’s overnight rate, but rather because lenders were beginning to reduce their discount spreads to the prime rate.

“Over the last few months with bond yields spiking, we’ve seen fixed rates start increasing quite significantly,” he said. “And meanwhile, variable rates were lagging, so I think lenders were starting to look at closing the loop a little bit and reducing the gap.

“We’ve also noticed on our end an increase in clients inquiring [about] and applying for variable rates over fixed, with the spread between the two anywhere in the realm of 125 basis points.”

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The fact that interest rates are still comparatively low by historical standards means that Canadians are continuing to take advantage for now, with homeowners also availing of the growing equity on their property brought about by soaring house prices and refinancing for investment purposes, such as buying a second home.

How long is that likely to continue? Much will depend on how the Bank of Canada approaches growing concern about the Omicron variant of COVID-19, which has thrown a spanner in the works of the prospect of global recovery from the pandemic in recent weeks.

Inflation also remains resolute, hovering just below the 5% mark, with the Bank noting once again in its last announcement on its overnight rate that it was keeping a close eye on that phenomenon moving into 2022.

Lee said that the Bank faced a difficult decision on that front, with the massive flooding that has recently taken place in British Columbia also representing cause for concern.

“With the uncertainty of the new Omicron variants and disruption to the supply chain because of BC, I don’t think there’s going to be any sort of rush to increase rates,” he said. “They’re really going to look at what’s going to happen over the next few months before deciding whether the rates will go up in April or wait towards the second half of the year.”

The emergence of the variant could also have some impact on consumers’ behaviour, he said, with the prospect that travel might go down along with consumer spending. “If there are additional public health measures, who knows what’s going to happen?”

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Of course, there’s also the fact that any interest rate changes in 2022 are likely to be modest hikes, with the Bank wary of introducing increases that are so drastic or sudden as to potentially derail the Canadian economy.

“I think any time you have modest increases versus something that is too aggressive or overwhelming, it’s much easier for consumers to adjust to that,” Lee pointed out. “If they hike rates too aggressively, that can cause default for a lot of consumers – not just for mortgages.”

With that in mind, the question of whether customers will gravitate more towards fixed or variable rate options is one that’s likely to remain prominent throughout 2022. Lee said that while both had their advantages, the choice ultimately depended on the personal preference of the client and their appetite to embrace risk.

“Fixed rate mortgages are still at historic lows and give you a kind of peace of mind locking in for a number of years, knowing that your payments are fixed and that you can sleep at night without having to worry about anything,” he said.

“With variable rates, there’s a very compelling case, since there’s a huge discount between the fixed and variable. Historically, variable rates have outperformed fixed probably over 70% of the time. [However,] what I tell my clients is that it’s a personal decision. It’s important to understand the person’s individual situation.”