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Fixed VS Variable in May 2024

Vancouver Real Estate: Trends and Predictions 


The Greater Vancouver real estate market is doing better this year vs April 2023. Sales increased 3.3% to reach 2,831 homes sold. Even if this is better than last year, we are still 12.2% below the 10-year average. The interesting fact is that we are doing better than last year in the number of sales, but inventory is rising. We reached 12,000 units for sale for the first time since summer of 2020. Prices have continued to go up. For detached homes (single family homes) the typical house is now at $2,040,000 up 6.3% since last year. Prices for a typical townhouse are now $1,127,200, up 4.3% since last year and a 1.3% increase from March 2024. The typical condo sold for $776,500 and was up 3.2% since last year and 0.1% lower than in March 2024.


So, with inventory building up and price raising, it is possible that if sales do not increase significantly that prices may stagnate. However, prices are unlikely to fall since the market is balanced. This represents a great opportunity for qualified buyers to negotiate prices down and avoid bidding wars. So, if you are looking for a place to buy, your shopping experience will be much better than it was just a few months ago. 


The economy and the Bank of Canada


 Inflation data, which is one of the most important metrics that the Bank of Canada follows, was at 2.9% in March 2024 (the latest data). This is now the third consecutive month of sub 3% which is the high limit for the BoC inflation target. Another important metric is the level of unemployment, which increased at 6.1%. Excluding the pandemic, the last time Canada had this level of unemployment was in 2017. In 2017, BoC had the base interest rate at 1% not 5% like we are now. So, in many ways Canada’s economy is slowing down, which will reduce inflation further. So, the probability of the Bank of Canada to start cutting rates in the coming months is very good. I expect the BoC to start cutting rates in June and gradually cut rates. I do not expect more than 2 cuts for 2024 and 1% to 1.5% extra cuts for 2025-2026. This would make for a total of 1.5%-2% in rate cut. Economic data may be changing this but for the moment, and from recent comments from the BoC, this is the most likely scenario. 


Fixed Vs Variable debate


With rate cuts coming soon (hopefully), I receive more and more questions about Fix vs Variable rate and which one to choose. The question is a very difficult one because fixed rates have already seen large reductions. So, the best 3 year fixed rate for now is at 4.99% and the best 5 year variable is at 6.19%. So, if you are buying at the top of your budget, it is easier to qualify with the 4.99% 3-year fixed. If you are not at the maximum, and you can qualify for your mortgage with the highest rate, would it be worth it? Let's look at the math.


Table 1: Comparison between 3 year fixed and Variable rate for a $500,000 mortgage amortized in 25 years



3 year fixed

Scenario 1

Scenario 2

Scenario 3

Interest rate

4.99

6.19

6.19

5.94

Total interest paid

71,800.00

75,800.00

72,100.00

69,600.00


Scenario 1 is 0.25% cut every 4 months up to 2% of cut or a rate of 4.19%

Scenario 2 is 0.25% cut every 3 months up to 2% of cut or a rate of 4.19%

Scenario 3 is 0.25% cut every 3 months but up to 2% but starting after the first cut already happened from 5.94 to 3.94 (this would be 2.25% cut from today’s rate)


As shown in Table 1 all the scenarios studied come up with very similar total interest paid after 3 years. What will make the difference is your belief of the speed of the rate cut and the deep they will be. One thing to take into consideration is what would be your starting rate and what will be your equivalent 3 year fix. If the difference is less than 1.2%, your likelihood to save money with the variable rate is greater than if the difference is more than 1.2% . You can also disagree with my view of a 2% cut. If you expect 3% of cut in the next 3 years or if you expect the 2% cut to happen in less than 18 months. Taking a variable rate is a good idea.  Now, there is no crystal ball precise enough to know which possibilities will become reality. So, for many of you having the certainty of a rate and payment makes a lot of sense and this is why the 3 year fixed rate is so popular right now. 


If you have questions about your mortgage and your specific situation. This could be for an existing mortgage or trying to get a mortgage. Do not hesitate to contact me or Gina. The simplest way is always to make an appointment. 



We are here to help you make your homeownership dreams a reality.


Sincerely,


Simon Bilodeau and Gina Lopez

Mortgage Broker

RefinanceBC

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