Robert McLister: Here are reasons you might want to stick with variable for now and reasons you might want to grab a fixed rate

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Four months have passed since the Bank of Canada‘s latest rate reduction, with no guarantee of another on the horizon. Policy is on hold while officials monitor inflation and play psychic with tariff headlines.

Plenty predicted the economy would already be nosediving by now. Just a few months ago, markets forecast three more Bank of Canada rate cuts before Christmas. But job growth and stubborn inflation erased that fantasy — now they’re not even pencilling in a full single cut.

At the same time, government bond yields — which typically guide most mortgage rates — have shot up to six-month highs. The Bank of Canada–leading two-year yield even sprinted above the overnight rate target for the first time in more than two years.

Despite most economists claiming there are cracks forming in our economy, markets still think inflation has teeth. If traders are right and economists are wrong, further rate cuts could stay shelved for months — maybe skipped entirely this cycle.

This prompts a key dilemma for certain variable-rate holders: should you lock in now or keep riding the rate waves?

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Reasons you might want to grab a fixed rate:

• Variable-rate stress is wrecking your nerves.

• Your family budget can no longer bear the chance of sharply higher payments.

• Your lender will let you lock into a great fixed rate in the low fours — or better.

• You’re not likely to break that new fixed-term early, for example, by refinancing elsewhere or selling your home and not porting the mortgage to a new property. (Note: Sometimes lenders claim their mortgages are portable, but their actual rules or qualification criteria prevent it.)

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Reasons to stick with variable for now:

You’re mentally and financially equipped to handle rate volatility and uncertainty (hopefully, this is the case, given you picked a variable in the first place).

• You won’t be hanging onto your mortgage for long anyway.

• Your variable rate is much better than the best fixed rate you could get from your existing lender or another lender (after paying prepayment and refinance costs).

• You have a great variable rate with fixed payments.

• Your mortgage size is modest relative to your income.

• Your remaining amortization (time to pay off the mortgage) is short.

• There’s a decent chance you’ll need out before the fixed term ends, and fixed-rate penalties sting more than the usual three months’ interest on variables.

• Most variable mortgages can be converted anytime without penalty, so you can wait until the fog lifts on Canadian–U.S. trade policy.

If you’re tempted to lock in, scout the best mortgage rates online first. Then contact your lender to confirm the lowest fixed rate they will offer you for the mortgage features you need, and haggle if needed.

Once you nail down the lender’s offer, consult a seasoned independent broker and have them crunch the numbers and see if locking in actually works in your favour.

If it does, ask them if changing lenders makes mathematical sense after tallying all the penalties and fees.

Not surprisingly, if we do end up getting a few more Bank of Canada rate cuts, folks who ride out heavily-discounted variable rates should make out like bandits. If you’re floating at one per cent off the prime rate and you tick the “stay variable” boxes, locking in may not be wise.

That said, depending on your rate, locking in could bring instant savings and a calmer sleep schedule. And consider where we stand now:

• Average core inflation is sticky and rising at 3.05 per cent (our central bank’s target is two per cent).

• Canada’s policy rate has already dropped to the Bank of Canada’s estimate of the long-run “neutral rate.” (The neutral rate is the estimated policy interest rate that keeps inflation stable and the economy at full capacity, neither stimulating nor restricting growth.)

• Government spending is running wild, which is inflationary.

• Persistent tariffs could pose an inflationary hazard.

• The economy refuses to fold. (Case in point: June unemployment unexpectedly dropped to 6.9 per cent as Canada created an estimated 83,100 jobs.)

• Markets are pricing in, at best, one more rate cut this cycle, according to forward rate data from CanDeal DNA.

• Fixed rates are still near three-year lows but starting to rise.

Given all these factors, one could argue that now may be a fleeting window to lock in a variable mortgage before rates march higher.

Of course, what comes next is still a mystery box. If you lock in and the Bank of Canada cuts again, you’ve forfeited lower interest costs.

Then again, you’ve also received value for that price: certainty. In an era of economic twists, predictability might just be the smartest investment.

SOURCE AND FOR MORE INFORMATION: Is it time to lock in that variable mortgage rate?