VARIABLE-VS. FIXED-RATE, NEGOTIATING TIPS AND EVERYTHING ELSE YOU NEED TO KNOW ABOUT MORTGAGES.
COMBINATION OPTION IS ONE OF THE LESSER-KNOWN CHOICES
Here’s the long and the short of the mortgage market: there are no guarantees. The spread between locking in and floating has never been skinnier, yet the threat of rising mortgage rates fail to materialize year after year.
It’s the spring buying season and, since few Canadians buy their homes with cash, homeowners face a major debate when it comes to their mortgage and debt. They can lock in their mortgage for five years and get a rate near an all-time low, or they roll the dice and decide to float with the prime lending rate, hoping for savings, but also opening themselves up to the insecurity that rates could rise.
“Rates are ultra low,” said Penelope Graham, an editor ratesupermarket. ca. “There really is no element of surprise. We’ve seen rates go lower and lower because of bond yields. Investors just keep reacting to the slow economic growth. And lenders have responded with record-low mortgage rates. There’s (no room) for crazy marketing tactics this year.”
Even among mortgage brokers, there hasn’t been a real scramble to bid down rates to get consumers through the door at record low rates.
With such a flat yield curve, the question for consumers today is whether it’s worth gambling on a variable rate mortgage to save as little as 25 basis points. Graham’s website lists the best five-year fixed mortgage at 2.34 per cent, a rate that is guaranteed for five years. Compare that to a five- year floating rate variable product of 2.1 per cent, which would likely rise during the term if the Bank of Canada raises rates.
Will Dunning, chief economist at Mortgage Professionals Canada, said the breakdown has traditionally been about 70 per cent locked-in to about 30 per cent variable.
“It doesn’t change very much unless there is a really big spread between (the two rates),” he said. “A lot of it has to do with how experienced people are. An older person who has been through several (interest rate) cycles is more likely to go with variable rate than a younger person.”
But what if you didn’t have to choose? A small sliver of the mortgage-paying public — about five per cent, according to Dunning, goes with a lesser- known option: the combination mortgage.
Most banks offer a way for clients to have the best of multiple worlds, by tailoring a mortgage product that has debt maturing in different years. Scotiabank, for example, has something called the Scotia Total Equity Plan, which allows customers to take different products within the overall borrowing limit.
“Some customers will take more than one mortgage component, it could be a fixed term, a variable term or even part of it as a line of credit,” said Boyle. One obvious benefit of this strategy would be that the portion of the mortgage taken as a line of credit can be paid off at any time, potentially allowing you to increase the equity in your home more quickly than with other payment options. That flexibility generally comes with a higher interest rate.
No publicly traded company would ever have all its debt coming due in the same year, but consumers tend to have all their eggs in the same basket when it comes to debt.
“Certainly we discuss diversifying your assets,” said Boyle, agreeing there’s no reason consumers can’t have the same approach to debt today.
When it comes to more conventional mortgages, though, another key factor that drives people to the fixed- rate option is that they can get a larger loan. Consumers with a fixed- rate product of five years or longer can use the rate on their contract to qualify for a loan — a lower rate means lower monthly mortgage payments and an ability take on more debt.
In a move some say was aimed at scaring people away from more volatile variable- rate products, Ottawa requires consumers who choose that option to qualify based on the five- year posted rate which is now 4.85 per cent. “Qualifying based on the posted rate is itself a deterrent for most people,” Dunning said.
Janet Boyle, vice- president, pricing and marketing for real estate secured lending at Scotiabank, said the 70/ 30 fixed/variable split is common across the industry. She says people need to ask themselves what their needs are when it comes to borrowing, but bank itself has no preference.
As an example of considering your own needs, she points to a customers who might be buying a home and only planning to be in it for a short time before they move. That customer does not want to lock in to a five-year term because they could face penalties trying to get out of the mortgage. Variablerate mortgages are typically easier to exit, because the penalty is just three months’ of interest.
The key question for a customer considering variable rate is whether or not they can handle a rate increase that is always possible without a rate guarantee. “Can they sustain the mortgage and payment,” said Boyle, adding that customers may also opt for a variable product that allows you to lock in during the term.
Determining what the rate will be based on if you decided to go from variable rate to fixed during the term of your contract is something that should be spelled out in your contract, according to mortgage experts. Generally, though. you can only lock in based on the prevailing rates. So, if you have a five- year variable- rate mortgage and want to lock in after two years, you would look at the threeyear fixed rate ( and hope it hasn’t jumped too much.)
Boyle said Scotiabank will offer a competitive rate, if you end up converting your mortgage.
The ultimate in conservative debt planning just might be the 10-year mortgage, a small sliver of the market, which can probably be chalked up to the higher rate. Ratespy.com says the best rate on a 10-year fixed rate mortgage is now 3.55 per cent — about 50 per cent higher than today’s best five-year fixed mortgage, but guaranteed for a decade.
“It is still pretty attractive relative to rates we saw a few years ago,” said Boyle, about the 10- year product. “(Consumers) are reading what they can get ( for five years) and it seems like quite the differential. They also don’t want to lock in because they might make changes within that 10-year period.”
THERE REALLY IS NO ELEMENT OF SURPRISE. WE’VE SEEN RATES GO LOWER AND LOWER BECAUSE OF BOND YIELDS. INVESTORS JUST KEEP REACTING TO THE SLOW ECONOMIC GROWTH. AND LENDERS HAVE RESPONDED WITH RECORD -LOW MORTGAGE RATES. — PENELOPE GRAHAM, RATESUPERMARKET.CA
SOME CUSTOMERS WILL TAKE MORE THAN ONE MORTGAGE COMPONENT.