Despite an interest rate hike, variable mortgages are still a smart investment

This morning, July 11, 2018, the Bank of Canada increased its overnight rate by 0.25 per cent to 1.5 per cent. It was the first rate hike in six months, but bank’s fourth increase over the past 12 months.

The overnight rate — what major financial institutions charge each other for a one-night loan — is a trendsetter. It leads financial institutions to raise prime rates, which means Canadians will be paying higher borrowing costs on such products as variable-rate mortgages.

For mortgage shoppers, there is absolutely nothing to fear in this news. With a new prime rate of 3.7 per cent, we are still highly recommending variable mortgages to our clients.

We’re saying: Do not lock in, and do not take a fixed rate. Here’s why:

The average spread between a five-year fixed mortgage and a five-year variable mortgage is now around 1 per cent.

So the prime rate would have to go up by 0.25 per cent eight or nine times more for you to be paying more interest on your variable-rate mortgage over a five-year term, when compared to a five-year fixed-rate mortgage.

The rule of thumb is: If the spread between a five-year fixed and a five-year variable is 0.5 per cent or more, go variable.

Consider the penalties

It’s important to note that the penalty on a five-year fixed mortgage is, on average, about nine times greater than that of a variable mortgage.

The average bank penalty to break a five-year fixed is approximately 4.5 per cent of your outstanding balance. So, for example, on a $400,000 mortgage, that would be a penalty of $18,000.

Compare that to the $2000 penalty on a variable-rate mortgage. It’s a massive difference.

Pay down your principal

We recommend our clients take a variable mortgage, but that they make payments as if they went fixed. So an additional $300 or 400 a month goes towards paying off the mortgage principal and not to the bank in interest.

We help clients build a plan so they can save thousands and pay off their mortgages faster. And in our view, it’s still a no-brainer to go variable.

Banks will always recommend locking in. In times like these, they’ll encourage clients to take a fixed rate product. But did you ever wonder why?

It’s because fixed rate mortgages are very profitable for the banks. The five-year fixed product is one of the most profitable mortgage products ever sold. And with massive penalties, it locks the client in.

Since about 60 per cent of clients break their mortgages, it almost never makes sense to go fixed. None of them plan to break their mortgages. But it happens. And we don’t like to see our clients slapped with big penalties when they’re facing unexpected life changes, so we advise against fixed-rate mortgages.

Back when we had five-year fixed rates at around 2.59 per cent or lower, there was a good argument for locking in. But those days are now gone.

Speaking with an experienced mortgage broker can help you define and realize your financial goals amidst a changing economic landscape. Call or email me any time with questions you or your clients might have about mortgages.

Mortgage Education

New “Universal Stress Test” FAQ’s:

With the formal announcement less than 24 hours old (on the mortgage rule changes that are coming into effect January 1, 2018), we have already seen a flood of questions coming in from realtors and clients alike….So, I thought I would take a moment and share the more common one’s with you:
Read More…

Home Ownership

Tips to get your finances on track in 2017

finances on track in 2017With a new year comes new beginnings and new resolutions. Some resolutions are professional, like getting a raise or job promotion. Other plans, such as a long-anticipated vacation, are on the fun side. Either way, planning, completing and checking off most of your goals involves sorting out your personal finances.

Listed below are tips to help you turn your financial plans into solid actions. Read More…

Home Ownership, Mortgage Education, Mortgage News

Understanding Accelerated Payments

accelerated paymentsAn increasingly popular way Canadians choose to pay off mortgages before their amortization period expires is by making accelerated payments. Owning a home and paying off a mortgage takes the average Canadian household between 20-25 years.  However, a salary raise, job promotion, being prudent spenders, or an inheritance can help interested couples use their newfound capital to shorten that time. Read More…

Home Ownership

Does marriage improve a couple’s finances?

marriage improve a couple's financesTying the knot comes with understanding your future spouse-to-be’s personal finance habits and goals, ideally before marriage. From managing credit, loans, assorted debt, insurance policies and merging bank accounts, there’s lots to financially prepare for.  Weddings can be costly, and in Canada,  costs average around $20,000 for the Big Day. Many couples finance their weddings through a combination of family contributions, gift fund registries, and loans. Some add personal savings to celebrate what will be one of the most important days in their lives. Yet, what happens after a couple says their “I Do”s?

Read More…

Home Ownership

Pro’s and Con’s of joint bank accounts

Joint bank accounts in CanadaJoint bank accounts in Canada are banking accounts held by more than one person. Engaged couples or newlyweds open joint accounts to pool their money together. Each account holder is free to deposit and take out money. Joint banking improves the overall personal finance skills and status of both partners in a relationship. On the other hand, joint accounts can also create problems for accounts holders who don’t maintain them well.

Read More…

Home Ownership, Mortgage Education, Mortgage Refinance

What is a HELOC Mortgage?

HELOC mortgageHELOC Mortgage: Briefly Defined

A home equity line of credit, or HELOC mortgage, is a type of loan and most Canadian banks deliver it on revolving credit. HELOCs allows new and seasoned homeowners to borrow up to 65% of a home’s current value minus your mortgage’s outstanding balance. This amount is known as home equity. Home equity typically increases as you pay off your mortgage and your home value increases. You can get a HELOC on a fixed or variable rate. Some banks, such as TD, may allow you to combine your HELOC with your mortgage to borrow 80% of your home’s equity for a fixed term of time. To qualify for a HELOC, your outstanding mortgage balance plus the HELOC typically and usually cannot exceed 80% of your home’s overall value.

Read More…