Mortgage Rates

Variable vs Fixed Rates – The Great Rate Debate

The Great Rate Debate

Should I even start?  This is a huge topic of controversy among Canadians right now between those of us with industry knowledge and experience and even those who don’t.

Here’s my TAKE on it, I do not present this with any predictions or claim for it to be fact.

This is how I advise my clients when they ask me – “Should I go variable or fixed?”

First, yes, the Bank of Canada conditionally agreed to keep the key over night rate at the current rate until spring 2010.  I say conditional, because they have reserved the right to change it at any time..

Second, Helmut Pastrick, chief economist with Central 1, has indicated to CBC in October that the Bank of Canada is anxious to move away from low rates.  He predicts that the bank will likely raise rates by half a percentage point at a time perhaps three times through the fall to spring from 2010 – 2011.  “That would allow them some room to cut rates should the economic recovery falter.”  With this information, it makes me uncomfortable to advise a variable rate, especially when the 5 and 7 year fixed rates are so low.  Why not lock into a nice low rate that won’t be subject to uncertainty during these times?  No one can accurately predict the future and with this type of economic uncertainty, wouldn’t it be nice to know that your mortgage payment is not going to be affected by it?

I recently had a discussion with a young man in Fort McMurray who was buying his first home.  He was pre-approved for many months prior to finally finding a condo and making an offer.  When it came time to do the financing, he got a rate of 4.34% for a five year fixed.  He sent me an email a few days later, saying he was talking to his friend and asked me why I didn’t get him the 2.2% 5 year variable that was available at the time.  I explained to him that he indicated initially he was only interested in a five year fixed, which is what his pre-approval was based on.  I then proceeded to explain how a variable works, the risks involved and what I would suggest given the current economic environment.  He responded later in another email indicating he went to another mortgage broker in Fort Mac that said the opposite.  This mortgage broker said that the variable was the way to go and that he would save $52,000 the first year alone in interest.  He also said that he questioned whose interests I was really looking our for, his or mine.

Well.  If I was not looking out for his interests, I would not have explained the risks associated with the product, I would simply have switched him over to that product.  The finders fees we receive for either product are identical, so there was no further benefit for me to place him in one verses the other.  As far as saving $52,000 in interest the first year… well, that is not even remotely possible.  I feel we, as professional’s have the responsibility to advise our clients on the risks associated with a variable rate right now.  Yes, 2% is a lovely rate.  The problem is, however, if prime goes up to say, 5% and you have a P.-10% rate, your rate is now 4.90%.  That is more than you would have been paying if you locked into a five year rate initially.  Additionally, yes, you can lock in at any time.  Typically when the variable rates are going up, so are the bond yields, making the fixed rates go up too.  So even though “YAY” you can lock in, you are still not locking into the fixed rate you COULD have, initially.

Again, this is simply my take on the Great Rate Debate….