Warning against locking into fixed mortgage rates now as rates may fall further

While fixed mortgage rates have dipped, borrowers should be cautious about locking into a five-year term today. The current fixed rates of 4.3% to 4.5% are still high by historical standards, and the market is pricing in multiple rate cuts from the Bank of Canada later this year. If the central bank reduces its key rate by even 50 to 75 basis points in 2024, variable rates could fall below 5.5%, making them cheaper than today's fixed offerings. Moreover, locking into a fixed rate now means paying a penalty if you want to break the term early to switch to a lower rate. That penalty can amount to thousands of dollars, effectively locking borrowers into an above-market rate. Many economists expect inflation to continue cooling, which would give the Bank of Canada room to ease policy. Rushing into a fixed term could mean missing out on significant savings in the second half of the year. Borrowers who can tolerate some payment uncertainty might be better off choosing a shorter fixed term, such as one or two years, or even a variable rate with a trigger rate protection. The safest move is to wait for the March and April rate decisions before making a long-term commitment.