Is it time to switch from a fixed-rate to variable-rate mortgage on your cottage?

With the cost of borrowing on the rise, cottage owners might wonder if now is the right time to switch from a fixed-rate mortgage to a variable-rate one—or continue to weather the storm until borrowing rates begin to cool.

After cutting interest rates to near-zero levels at the start of the pandemic to encourage spending, Canada’s central bank has hiked interest rates five times this year to tame soaring inflation, which has risen to its highest level in decades.

On September 7, the Bank of Canada raised its key interest rate to 3.25 per cent, triggering higher borrowing rates for homeowners who are up for renewal on their fixed-rate mortgages or ones with variable-rate mortgages. In an environment of rising rates, more of your payment goes towards interest, which means it will take you longer to pay down your mortgage. (For example, as of writing, borrowers with TD Bank can expect to pay 5.24 per cent on a five-year fixed mortgage or 5.15 per cent on a five-year variable mortgage.)

Andrew Thake, a mortgage broker based in Ottawa, cautions cottage owners against getting swept up in the panic of rising rates. First and foremost, Thake says anyone with a variable-rate mortgage on a cottage should call their mortgage broker, not their bank. “A broker can give them a broader scope of the options available at their lender and dozens of other lenders.”

Thake says some lenders may fix the payment on the variable interest rate mortgage. “There are a select group of lenders where if rates go up and down, your payment stays the same,” he says. “And then within that payment, the mix of principle and interest changes.”

According to Thake, cottage owners can jump ship to a fixed rate for peace of mind, but it comes with risks. “If we look at charts of variable interest rates over the last 10, 20, 30 years, those who have gone with a variable rate tend to have done better than those who have gone with a fixed rate,” says Thake.

The data backs this up. Canada Mortgage and Housing Corporation found that homeowners with variable-rate mortgages had paid an average interest rate of 4.14 per cent in the past 25 years, which is lower than the average 5.30 per cent fixed-rate holders paid over the same period.

There’s no penalty associated with switching from a variable to a fixed rate on your mortgage. “But if you ever want to switch from a fixed to a variable rate, you can’t do that without a penalty,” says Thake. “Plus, the penalties on fixed rates are typically quite large when we compare them to penalties on other types of mortgages.”

Thake says whatever decision you make, it’s important to make it with a long-term view in mind. “If you start to time the real estate market, it would be like timing the stock market, and most people don’t fare too well with that kind of stuff.”

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