Variable rate vs Fixed rate Mortgages

Variable Rate mortgages and the crystal ball…..

December 12, 2018



I often wish my office was equipped with a crystal ball….  One that would tell me what interest rates are going to do.  So I could be the hero in all mortgage transactions.  

http://harmonymortgage.ca/application-form/

I have been surprised by the amount of clients calling asking if now is the time to “lock in” or ones who take a substantially higher interest rate because their neighbor told them about a time when interest rates were at 12%!!!! Way to freak us all out people!  Let us put that into a realistic perspective for the ones who didn’t buy a house in the 80’s for $150,000 (that is now worth $800,000).  Interest rate hikes in the magnitude described (by your neighbor) would not be beneficial to Canada’s overall well being.  A hike in that grand of a scale would cripple more than just home owners.  It would affect overall borrowing, your credit cards, your loans, your lines of credits, as they all follow Bank of Canada prime rate.

http://harmonymortgage.ca/application-form/

“The high interest rates of the early 1980s must have felt unbearable for all Canadians buying homes and arranging mortgages (it was heaven for savers, but never mind). The reward for perseverance was a 30-year run in which resale house prices on a national basis surged by an average annual 5 per cent and were up in 28 of 34 years…….. This rally was fed by falling interest rates. After the visit to high-rate hell in the early 1980s, home owners benefited from a long decline in rates that continued into 2015. House prices haven’t gone up because homes are a great investment, because of immigration, because of foreign money or because home ownership is awesome. It’s because we’ve had a 30-year sale on the cost of financing a home purchase, with ever-increasing deep discounts. …. No one expects dramatic increases in mortgage rates, so a 1981 redux is out of the question. But if mortgage rates grind higher over a period of years, today’s house prices are going to be increasingly difficult to afford for both first-time and move-up buyers” Globe and Mail : Comparing Canada’s housing market with the high rates of 1981

This morning for instance people were talking about the expectation of 3 or more rate hikes in the next couple years.  Flip a switch (or turn the channel) and read Bank of Canada’s latest rate statement ….just like that the variable is looking pretty sweet once again.  In fact they are predicting that not only is there an unlikelihood of 3 more hikes we may see only see 1 rate change this upcoming year.  Now back to my crystal ball….. of course there are no certainties in taking a variable rate mortgage.  But reality is there are some awesome variable products out there.  Currently Prime is sitting at 3.95% many of our lenders are offering as low as Prime MINUS 1% !! that means 3.95%-1%= a mortgage rate of 2.95% vs the same lenders fixed rate which is at 3.69%.  Pretty huge difference on the payment (for a mortgage of $500,000 the payment would be $155 more /month $1860/year and $9300 over the 5 year term . 

I explain it to my clients in risk factors and comfortability.  Taking a fixed rate is essentially an insurance policy on rate hikes if $155/ month is peace of mind then there is no reason not to take a fixed rate.  If you are the type of person who stresses over not knowing if your payment is going to change at all (up or down) in the 5 year term you must consider if the level of risk is worth it for you. 

But when you look at it like in the example above the difference in the rate 2.95% and 3.69% is .74%.  What does that mean?  Well if you look at how Bank of Canada’s rate hikes they historically are .25% change at a time.  So that would mean BEFORE you even are at the same rate that you would have if you had taken the fixed rate in the first place Bank of Canada would have to have met and decided to MOVE PRIME 3 TIMES. Is that realistic??? …. Crystal ball???  Let’s look a little more about what has happened in the past, as nothing can predict the future but we can learn a lot from the past. 
History of Bank of Canada Prime rate: July 2015 Prime hit its all time low at 2.7% at this time there were people in variables less than 2%.  This happened to be the month I started as a mortgage broker and ironically the beginning of a very slow realestate market….. I survived!!! Prime stayed this low for almost 2 YEARS!

Hold the applause….. as much as this was great for people in terms of their mortgage payment.  Considering it was a time of a very slow economy, jobless rates were at an all time high and the realestate market was seeing a massive correction many families were struggling to pay for the basics, unlike now in 2018.  In 2017 we saw 2 only increases to Prime a reasonable slow increase.  This change in rate would increase the average household less than $90/month/ (based on an average mortgage of $350,000 Prime -.85% variable). Which brings us to 2018, the year you had multiple offers, no subject offers and quite frankly the 6 months that scared many of my client to even wanting to list their properties in fear.  Thankfully that short craze has subsided and we have a more normal market.  Our office is busy with pre approvals.  We see new clients daily who are all waiting for the perfect time to buy.

  A wise realtor once said…. “the best time to buy a house is WHEN YOU CAN!”  I never understood why my parents told me after finishing school and getting a job next step is BUY A HOUSE… I was like, “Why? that sounds like a lot of money…. I could just rent”… but I obediently listened and bought a brand new townhouse for $130,000, fast forward 20 years that exact same townhouse just sold for $460,000 so I guess lesson learned….. it’s not just about paying off your mortgage or your rent paying someone else’s.  It is about having the advantage of the increase in the housing prices, capitalizing on the gain in equity and opportunity to use your house as a piggy bank if needed.  Those same houses that people were paying 12-20% interest on in 1981 cost under $200,000… compared to 37 years later that $200,000 house is a million dollar home….. it’s all relative people….