24 May

A Few Reasons Why You Should Consider A Variable Rate Mortgage


Posted by: John Panagakos

Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.

Years ago variable rate mortgages saved you more money than fixed rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced home owners often took a VRM at mortgage renewal time.

However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.

Once again , the gap is widening. While fixed rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction.  Two years ago a VRM would be offered at Prime rate + .20%,  but later it reverted to Prime – .30% . In recent months, rates have dropped even further with some lenders offering Prime -1.0% !  You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45% . With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM. Remember once in a VRM, if rates start to so above a certain percentage you can always switch to a fixed rate.




2 May

Should I lock in, or stay variable?

Mortgage Interest Rates

Posted by: John Panagakos

You’re in a variable rate and asking yourself should I lock in or stay variable?

If you follow the news closely, there would appear to be a lot of turmoil and uncertainty around interest rates. This past April, the Bank of Canada held the overnight rate at 1.25 per cent.  Suggesting the bank was closely watching both inflation and wage growth.

“The Bank will also continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity. In this context, Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data,” the BOC said at the time.

The Bank of Canada raised the rates a quarter point twice last year.  Many economists are betting the bank will raise rates before the end of this year.

If you’re a conservative homeowner and have locked into a fixed rate, the speculation of an increase isn’t likely keeping you up at night. You can rest easy for the next few years.  However, if you’re like many Canadians who chose to go variable, this is probably getting you a little nervous. While mortgage brokers don’t have a crystal ball to tell you where rates are going, you can probably assume they are going to increase maybe 50 basis points. There’s all kinds of tea leaves economists trying to read and get a handle on where the rates will go. While that’s what they get paid to do, increases have real world consequences on your bottom line.

So again the question is, should I lock in or stay variable?

And like many financial questions, there’s no easy answer. First, you’ll tend to find first time homebuyers are sceptical with variable anyway.  Someone in their second or third mortgage may have an appetite for a little more risk.

If you’re kept  awake at night in fear of a rate increase, you may want to lock in.  Locking in your rate can give you peace of mind. But it’s also important to look at the big picture. If the rate increases a couple more quarter points, you still need to look at what that variable rate saved you over the term. The rates have been historically so low, there’s a pretty good chance if you’ve been in a variable for a few years, the math will prove you still saved money over the five years, even with an increase.

Depending on your risk appetite and your financial situation, staying in the variable could still payoff in the long run even with a few more increases. Don’t make these decisions alone, come speak to me and I will answer any questions about locking in or not.