Wait a minute… variable rates are now higher than fixed rates?

The Bank of Canada recently announced their first, and possibly the last, rate hike of 2023 on January 25th, bringing the key rate to 4.50%. This increase was widely predicted by economists well before the official announcement and our own analysts concurred. These are the highest interest rates have been since 2008.

If you’ve been paying attention to the mortgage market, planning to buy your first home, or a current mortgage holder, you might have assumed fixed rates were the stable, but more costly option. In recent times, fixed rates have typically been offered at a premium to variable rates as most lenders predicted that rates wouldn’t stay so low forever, especially with rising inflation. 

But now the tables have turned.

As of January 2023, lenders are now offering variable rates at a premium to their fixed rate mortgages, at a difference of nearly 100 basis points. Just take a look at the latest mortgage rates from our lenders to confirm it. As of March 2023, we offer 5 year fixed rates of 4.69% and a 5 year variable rate of 5.60%.

Why are variable rates higher than fixed rates now?

The fact that mortgage lenders are offering variable rates higher than fixed rates tells us a lot about where they think interest rates are going to trend in the future. When interest rates are low and inflation is high, like in 2022, lenders assume that the Bank of Canada will increase rates and therefore lenders offer fixed rates at a premium to variable rates. 

With inflation slowing down and high rates putting a strain on homeowners’ budgets, lenders are now predicting that in the next few years rates will be lower than they are now. The actual calculation that goes into determining what rates lenders offer is a lot more complicated than that, but overall we can tell that most lenders, including the big banks, are predicting that rates are likely to be lower than they are today, sometime in the next 5 years. 

Are interest rates going to come down soon?

While lenders and analysts are indicating that rates are likely to come down in the future, let’s remember that interest still remains well above the target 2% and the Bank of Canada makes no promises. Our own analysts are predicting that the January rate hike will be the last one before the Bank of Canada starts to move in the other direction. With that being said, we don’t think rates will start to come down until at least Q3 of 2023, and they will start coming down slowly.

Our mortgage forecast over the next 5 years

We can again look at the spread between variable and fixed rates to see that lenders are expecting it could take some time for interest rates to come back down.

The difference between a 3 year fixed rate and a 3 year variable rate is smaller than the difference between the 5 year rates, which might indicate that lenders believe it will be a while until rates come down significantly.

If you’re looking to take advantage of fixed rates and lock-in your mortgage, sign-up for Perch today and you can shop mortgage offers in minutes.