How to maximize a mortgage: Seven financial experts weigh in

To say that 2020 has been a difficult year for most is an understatement. With so much uncertainty and instability, it’s more important than ever to choose carefully when it comes to a large financial investment such as a mortgage. 

Interest rates are at historic lows, but does it make financial sense to refinance if it means paying fees to break the mortgage? Considering that rates aren’t likely to rise until 2023 at the earliest, are variable rates worth the risk? 

We reached out to financial experts and asked them for advice on navigating these crucial decisions given the current economic climate.

Which is better: a fixed or variable rate mortgage?

“A lot of personal finance doesn't always make cognitive sense, and depends on your individual factors, and what makes sense for your personal situation.

If someone has a less stable, unpredictable income (for example, an entrepreneur, or a freelancer), or works in an industry that is impacted or could be impacted in the future from the long-term economic climate that COVID-19 has caused, then a more stable, predictable mortgage might be better.  

If you have a number of assets and your mortgage could be easily paid off with your assets, then a variable rate mortgage would be more economical because you have the ability to take that added risk of increasing rates overnight.  Or if you are planning to add a laneway house but have already paid off the land, an added variable rate mortgage won't be too much of a financial stressor.

Another factor is your personality.  If you are sleepless the night before the Bank of Canada announces if they increase the interest rate eight times a year, then a fixed mortgage would be more suitable for you. 

As a single female condo buyer myself a few years ago, I actually opted for a fixed rate mortgage even though I could pay off the mortgage with my savings, because I liked the predictability of it.”  

-Genymoney.ca, millennial money expert and blogger

“There isn’t a one-size-fits-all answer when it comes to choosing a fixed- or variable-rate mortgage. It depends on your risk tolerance level, your amortization period, and the mortgage amount. 

With the government slashing the interest rate to try to boost the economy, the interest rate is already fairly low, but it doesn’t mean that it won’t fall even lower. If you are risk-averse and prefer stability, then choosing a fixed rate mortgage is a wise choice. On the other hand, if you have a high risk tolerance level and can afford a sudden increase in the interest rate, then you may want to take advantage of the lower rate of a variable-rate mortgage.”

-Bella Wanana, financial project manager and blogger

“The typical Canadian opts for fixed-rate mortgages to keep consistency between month-to-month payments. However, with a fixed-rate mortgage, you can sometimes risk paying a higher rate than the current market.

If interest rates are low, it might be a good time to lock in a fixed-rate mortgage. But, if you anticipate that rates may drop lower, you could consider a variable-rate mortgage. Ultimately, it's always a good idea to assess both options' risks and do your research. Determine your personal risk tolerance and choose whichever mortgage is best for your current financial needs. If you're still unsure, it's always best to advise a mortgage professional or review mortgage rate sites to gain confidence in your final decision.”

-Alyssa Davies, award-winning personal finance blogger and millennial personal finance expert at Zolo Homebase, Canada’s leading tech-powered real estate marketplace

“We personally believe this is a great environment to go with a fixed rate for the longest term possible. We've seen rates in the 1.5-2% range which is insanely low.  

With the Bank of Canada's policy rate at all time lows, quantitative easing, and bonds yields at historic lows, it doesn't seem like mortgage interest rates can go much lower at this point. I personally don't think we will see negative interest rates but you never know what the future holds. Maybe we could squeeze out another 0.25% lower? 

However, there is the potential for rates to go higher than that in the years to come which you would be privy to with a variable rate. COVID has shocked the markets and governments around the world are doing whatever efforts possible to keep businesses afloat and stimulate the economy.  Hence amazing borrowing opportunities. Personally, we jumped on this and purchased a home in October 2020 and locked in a fixed 5-year rate.”

-Court, founder of financial independence blog Modern Fimily

“In the current economic climate at the end of 2020, interest rates are extremely low. There really isn’t any more room for mortgage rates to fall. 

Anticipating that mortgage rates will rise, may entice some homeowners to lock in with fixed rate mortgages.  However, with widespread unemployment due to COVID-19 layoffs, a recession in GDP growth, and inflation well below the target of 2%, there is little reason the Bank of Canada would tighten monetary policy in the near term. In fact, they recently indicated it was unlikely they would increase the overnight rate before 2023.  So locking in at a higher rate seems like it won’t pay off for at least a couple of years. Even if rates go up in the future, you may save enough now to still come out ahead financially with a variable rate mortgage.”

-Kari, creator of the popular personal finance blog, Money in your Tea

With the current record-low mortgage rates, should I break my current mortgage to refinance now?

“The entire idea of refinancing is to save money. But, if you don't know about any of the mortgage breakage fees you might not end up getting ahead. My general rule of thumb is to see if you can get at least 50 basis points (or 0.5%) less than your current mortgage rate. If not, don't bother. Instead, stay the course while adding some lump-sum payments to your mortgage if you can.

If a homeowner wants to break their variable rate mortgage the Interest Rate Differential (IRD) penalty is typically equivalent to three-months' interest. If 40% of your $2,000 monthly mortgage payment is interest, then you'll be charged an IRD penalty of $2,400 to break your mortgage. Adding up $2,400 plus a few hundred bucks in other fees and breaking your mortgage could cost thousands of dollars. That is money you'll need to recoup in lower mortgage fees otherwise you're simply not getting ahead financially.

All mortgage contracts are not created equal, and each lender has their own terms and conditions in the fine print. Not to mention, the IRD penalty could be much higher for any fixed-rate mortgage as well.”

-Mark Seed, who runs the popular personal finance blog My Own Advisor 

“My advice is the boring answer that you can't escape the math. Find out what the penalty is to break your current mortgage (including any administration fees), compare that to how much you might save at the new lower rates, and you're most of the way to an answer. 

Then there are the classic questions about whether to refinance to a fixed or variable rate, whether to keep the same amortization schedule and amount, to make a lump sum payment or take equity out for other purposes.”

-John Robertson, founder of HolyPotato.net and contributor to the Because Money podcast