Views On Variables

“Typically a lender’s biggest fear is an informed consumer,” says mortgage planner, Peter Majthenyi. (See this Q&A with Rob Carrick)

That’s because informed consumers are more likely to make choices that are less profitable for lenders.

Going variable is one choice that’s yielding less lender profit these days. For many lenders, gross margins are currently over 20 basis points better in fixed-rate mortgages than in variables.

The big banks salivate at the thought of homeowners paying elevated 4.65% 5-year bank rates. (We’re talking discretionary fixed rates here. The banks’ publically disseminated “special offer” rate is even higher: 4.85%.)

At 4.65%, the average 5-year fixed bank mortgage is 156 basis points over the GoC bond yield (based on Thursday’s close). That’s a succulent spread for a lender. Remember: Five weeks ago, some lenders were selling mortgages at spreads of half that.

Not everyone’s biting, though.

The 2.9 percentage point gap between fixed and variable rates is wide enough to drive a truck through. Informed and well-qualified consumers are therefore comparing today’s fixed rates to prime - .50% variables—and many are taking their chances in a floating rate. 

Here’s what others are saying about variable rates:

• “If you have been in the mortgage for a while, and your mortgage is not as large relative to your income, pay with the variable and you will do better over five years from now, but not significantly.” (CIBC economist, Benjamin Tal)
• “No matter who I am talking to, I ask them to conceive that we are going to see a 3% increase in mortgage rates over the next three years.” (Mortgage planner, Peter Kinch)
• Mortgage planner, Ranjit Dhaliwal, declares variables the mathematical winner, assuming a 3% increase in prime rate (i.e.,  A 25 bps hike every two months for 24 months). (BNN)
• “Borrowers who secured a variable in the last year or so, and are paying prime plus .25% or greater, should strongly consider paying their small discharge penalty and changing to a prime less .5% mortgage immediately” (Mortgage planner, Peter Majthenyi)
• Going variable “is [not] the kind of advice I would give to someone who is fairly well mortgaged up with a debt service rate of 40%.” (Scotia Mortgage Authority’s Jim Smith)
• If you’re well-suited to a variable, “Keep the variable rate, but keep making payments as if [you] were paying a fixed rate.” (Peter Kinch)
• “In the coming months, we are expecting lenders to price variable mortgages at Bank Prime less .25% (or 2%)… so take advantage of the maximum discounts right away.” (Peter Majthenyi)
  
  (This is an interesting call. Most in the industry are expecting variable-rate discounts to remain the same or grow slightly bigger. Peter speculates that spreads will tighten as rates start rising, compelling lenders to decrease discounts. Just today, in fact, we saw one non-bank lender trim their variable discount. On the other hand, some feel that competition will force most lenders to absorb any margin compression and maintain variable discounts.)

______________________________________________

Sidebar:  Professionals endlessly cite Moshe Milevsky’s widely quoted variable-rate research.  They rely on Milevsky’s findings to state that borrowers have saved money in variables 89% of the time over the long-run.

Oddly, those same people rarely quote Milevsky’s updated mortgage research--which showed how the variable-rate advantage falls to 77% when the analysis uses discount mortgage rates instead of posted.

People also ignore Milesky’s warnings that it may be different this time, and that hybrid mortgages are often the most suitable solution of all. See: Fixed or Variable? Updated Perspectives

Important:  Variables are not suitable for everyone, but they’re a sound calculated risk for some. For more decision factors, see: I.D.E.A.S. For Choosing Between A Fixed And Variable Rate)