Fixed vs. Variable Mortgages in Vancouver: Historical Performance and Market Insights
When navigating the mortgage landscape in Vancouver, BC, one of the most pressing decisions for homeowners and prospective buyers is choosing between fixed and variable mortgage rates. This choice can significantly impact financial outcomes, especially in a market as dynamic as Vancouver's. Let's delve into the historical performance of both mortgage types and explore which has traditionally offered better value.
Understanding Fixed and Variable Mortgages
Fixed-Rate Mortgages: These mortgages lock in an interest rate for the entire term, providing predictable monthly payments. They're ideal for those seeking stability and protection against rising interest rates.
Variable-Rate Mortgages: These have interest rates that fluctuate based on the Bank of Canada's prime rate. While they can offer lower initial rates, they come with the risk of increasing payments if interest rates rise.
Historical Performance: A Canadian Perspective
Historically, variable-rate mortgages have often outperformed fixed-rate mortgages in Canada. A notable study by Professor Moshe Milevsky of York University found that variable rates beat fixed rates approximately 90% of the time between 1950 and 2000, primarily due to the premium fixed rates carry for interest rate certainty.
However, this trend isn't absolute. For instance, during periods of rapidly rising interest rates, such as in the early 1980s and more recently between 2022 and 2023, fixed-rate mortgages provided better protection against increasing costs. During these times, variable-rate holders experienced significant payment hikes, while those with fixed rates maintained consistent payments.
Vancouver's Unique Market Dynamics
Vancouver's real estate market is among Canada's most expensive, with housing affordability being a longstanding concern. The city's high property values mean that even small interest rate changes can significantly impact monthly mortgage payments.
In recent years, Vancouver homeowners have faced challenges:
Rising Interest Rates: The Bank of Canada's rate hikes in 2022 and 2023 led to increased mortgage rates, affecting both new buyers and those renewing their mortgages.
Affordability Issues: Despite recent rate cuts, the combination of high home prices and elevated interest rates continues to strain affordability for many Vancouver residents.
Current Trends and Considerations
As of early 2025, the mortgage landscape is shifting:
Interest Rate Cuts: The Bank of Canada has initiated rate cuts, bringing the benchmark rate down to 2.75% as of May 2025, offering some relief to borrowers.
Variable Rates Gaining Appeal: With expectations of further rate reductions, variable-rate mortgages are becoming more attractive. In the first quarter of 2024, 12.9% of new mortgage borrowers opted for variable rates, up from 4.2% in the third quarter of 2023.
However, it's essential to approach variable rates with caution. While they may offer savings if rates continue to decline, they also expose borrowers to potential payment increases if rates rise unexpectedly.
Making the Right Choice
Deciding between a fixed or variable mortgage in Vancouver requires careful consideration of personal financial circumstances, risk tolerance, and market expectations:
Fixed-Rate Mortgages: Suitable for those who prefer payment stability and are risk-averse, especially in uncertain economic times.
Variable-Rate Mortgages: May benefit borrowers who anticipate declining interest rates and can accommodate potential payment fluctuations.
In conclusion, while variable-rate mortgages have historically offered cost savings in Canada, recent market volatility underscores the importance of evaluating current economic conditions and personal financial goals when choosing a mortgage type in Vancouver's unique housing market.
Looking to get a mortgage in Vancouver but not sure where to start? Reach out.
Sources:
https://altrua.ca/variable-vs-fixed-mortgage/
https://wowa.ca/fixed-vs-variable-mortgage
https://www.reuters.com/markets/canadian-homeowners-consider-switch-variable-rate-mortgages-after-big-rate-cut-2024-10-24/
https://www.reuters.com/markets/rates-bonds/long-awaited-bank-canada-rate-cut-gives-canadian-homeowners-some-relief-2024-06-05/