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The shock to many is they will be renewing from rates based around one per cent.

I have spoken with are dealing with anxiety along with some confusion on what type of mortgage to choose. Let’s see if we can break down the choices and look at what is best for homeowners.

The first question I would ask a homeowner would be to determine how long they plan to stay in the home. If someone were thinking of selling and relocating within the next few years, the choice would be different than a person thinking of remaining in the home for 10 - 20 years. There are a few options to choose from, and here are the most common choices.

Fixed-rate mortgages

These products currently have higher mortgage rates; however, the rate is guaranteed for the term of the mortgage. Also, there are different penalties for breaking the mortgage. (Typically, they have a three-month mortgage payment penalty, or if the rates drop, they look at the loss to the lender if they loaned the mortgage to a new client at a lower rate. The lender applies the penalty that is the most costly to the borrower. Over the years, I have had clients face $20,000 or higher penalties.)

Variable rate mortgages

These products have a floating rate. Typically, the lender has a “prime” rate and offers the homeowner a discount off that rate. The discount stays the same, and as the Bank of Canada’s lending rate increases or decreases, it adjusts based on its prime. (This mortgage typically has a three-month discharge penalty.) The rate charged to the customer is currently lower than fixed mortgage rates.

The pros of a fixed-term mortgage are that the payment does not change for the term of the mortgage. The borrower knows exactly what they will pay monthly. The downside is if the rates decline, the borrower is locked in at a higher rate until the term is over. (This could be seen as a positive if the rates increase).

The upside of choosing a variable rate mortgage is that (currently) the rates are lower than fixed term options.

The gamble is that the rates will remain the same or decrease, making them a more cost-effective option. However, if the rates increase, the borrower will pay either a higher payment or will pay less toward the principal on each payment.

The importance of the question about how long a homeowner plans to stay in the home has to do with the discharge penalties.

If the plan is to sell in a year or two, a homeowner may choose a variable rate mortgage, understanding they are less expensive to break during the term.

If a homeowner is planning on staying in the home for an extended period, choosing a fixed-rate mortgage might become a good choice if the borrower felt that the rates would increase.

Chatting with a lender this week, I was informed that a five-year variable mortgage would have a discounted rate of 4.22 per cent, whereas a five-year fixed rate mortgage would be in the five per cent range. On a $500,000 mortgage, the difference between the two options is over $200 per month.

Again, as the variable rate can change monthly if the rates remain the same, the total difference over the five-year period would be $13,000. When a homeowner has a renewal approaching I find it best they review all of the options and their personal financial situation.

Is there secure employment? Do they feel the rates will go up or down over the next few years? Are they risk tolerant? The right decision is very personal.

I remember during the pandemic when rates were at rock bottom, I renewed a couple of mortgages as fixed-term products, and some of my colleagues questioned why I would not choose a variable rate mortgage as they were dramatically lower.

I believed that higher interest rates may be coming and once the mortgage rates started to increase in 2022, I had a low rate compared to some of the variable rates above six per cent.

If you have a mortgage renewing, my suggestion would be to reach out to a realtor or a mortgage broker to discuss the options and which ones make the most sense for you and your family.