Mounted or Variable? Floating-Charge Mortgages Dropping Their Lustre
This can be one of the toughest decisions for mortgage borrowers to make– –fixed rate or variable rate?
The historically narrow spreads between the two make this choice easier for many.
“When you’re in the trenches to buy a new mortgage, I’ll tell you something I have seldom told anyone in 13 years in this business: floating rates are a gamble that you don’t have to take on.” RateSpy founder Rob McLister wrote in Globe and Mail recently.
“I have no question that if you change your mortgage rate you will win for at least a year or two. But the third year is a bummer. And years four and five carry the legitimate risk of higher borrowing costs. “
Ron Butler of Butler Mortgages Inc. agrees, adding that with variable rates 50 to 60 percentage points below comparable fixed rates, “variables can thrive by simply being the lowest rate available and having a guaranteed low penalty there to break the mortgage, “he said to CMT.
“Today variables with a price difference of only 20 basis points or less are losing their luster.”
To date, some of the most competitive mortgage lenders offer 5 year fixed rates at less than 10 basis points above the lowest floating rates.
Floating rates have little leeway
When the prime rate fell from 3.95% to 2.45% in March at the height of the pandemic, it cut mortgage rates for thousands of floating rate holders. Some now enjoy floating rates as low as 1.50%.
For new borrowers, however, variable interest rates have largely lost their attractiveness as the key interest rate offers very little, if any, room for a decline.
And it increasingly looks like the key rate is as low as it will go.
The Governor of the Bank of Canada, Tiff Macklem, previously brought the idea of negative interest to the Kibosh and said, “If you look at the current situation … I’m pretty happy with the effective floor where it is.”
Subject to a drastic recovery from COVID-19 or a delay in the current economic recovery, interest rates are likely to remain unchanged for the foreseeable future– –and that could be a year or more.
What brokers have to say
The brokers we have contacted agree that fixed rates at these levels are hard to miss given the stability they provide.
“The premium between a floating-rate mortgage and a fixed-rate mortgage is the price if your rate doesn’t rise in the next five years,” said Dan Eisner, founder of True North Mortgage. “This insurance is currently super cheap.”
While adding that there is currently not much risk of being in a floating rate for the time being, he notes that when inflation starts to grow, “you want to jump into a fixed rate right away”.
Jason Henneberry of MortgagePal and Tango Financial told us that there are many factors to consider when choosing the right mortgage product.
“For example, a floating-rate mortgage may make more sense if the homeowner is likely to repay the mortgage early and wants a predictable three-month interest penalty,” he said. “A fixed rate mortgage, although at a slightly higher rate, can give peace of mind to people who just want to know their payments won’t change.”
For multi-property owners, he recommends a mix of fixed and variable in their portfolio.
“My favorite product for planning purposes is the multi-component HELOC,” said Henneberry. “I highly recommend this to clients looking for more creative ways to get their mortgage off the ground faster so they can pay less interest and still have access to their funds when they need it.”
For those still tempted by floating rates that are still slightly below comparable fixed rates, there is one more factor to consider: “Fixed rates are now so low that even a single rate hike a quarter point from the Bank of Canada – three to four years from now on, this could result in borrowers paying more interest on a variable than they would on a 5 year fix, ”wrote McLister.
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