Selling Fixed Rates

fixed-or-variable-mortgage-rates We’ve heard stories lately about mortgage reps issuing blanket warnings to homeowners about variable rates. The claim is that market uncertainty demands the certainty of fixed rates.

A couple of our clients have also been getting fixed-rate renewal offers from their existing lenders–far ahead of their maturity dates (6+ months ahead in some cases).  Interestingly, the fixed rates in those offers have been unusually competitive.

Why are some lenders more biased towards fixed rates all of a sudden?

Perhaps it’s because lenders have been making more money on fixed-rate mortgages lately.  Put another way, the spread between the cost of funds and the rates lenders charge has been wider with fixed mortgages.

Alternatively, perhaps those lenders don’t have cheap variable rates anymore and they need to sell fixed rates.

Whatever the case, the whole thing can be somewhat troubling.  We’re seeing borrowers with a good I.D.E.A. (1] income, 2] debt ratio, 3] equity, and 4] assets) being sold 5.50% fixed rates.

If you’re in a solid financial position, and you can find a variable at prime (and yes they still exist), then you’re immediately 1.50% behind the eight ball if you choose a fixed.  Moreover, by going fixed you’re bucking all the research in favour of variables.

Here’s another thing.  The big discounts are gone in the variable-rate market. But that doesn’t mean they’re gone forever.  If you get an open variable at prime, you’re well positioned to move to a discounted variable (at prime minus X) once those discounts reappear.

In sum, if you’re tolerant of a little risk for a lot of reward, and you meet the four criteria above, question those who recommend a fixed rate.  Maybe a fixed is right for you after all (every borrower has unique needs), but question nonetheless.

  1. Thanks once again for the great post .
    You helped me make a decision that I have working with.
    Up until last year I was a fixed rate customer with a local Credit Union. Last December we build a new house when Prime was 6.25%
    At that time I signed with ManulifeOne and have learned much since. So now I am close to moving back to the same credit union as they are offering an open variable at 3.99% Up until recently they have always offered a rate at around Prime – .6%
    My only question however is, what other terms should I be asking about? I know it is open variable with the usual options to lock in.
    Any suggestions?
    Thanks..

  2. With fixed rates at still historical lows compared to the last few decades average of around 9% I don’t understand why far more people aren’t locking in at much longer terms than they are.
    Maybe I’m just a ‘safety net’ kind of guy but looking back when I picked up my 5.09% 5 year fixed I believe I could have got a 5.99% 10 year fixed and I’m thinking that may have been a better choice. So far I would have done better in a variable, but who knows over the whole period.
    I think what it really comes down to is that if you found a house your can afford, fits your family, and you like the home owner lifestyle you should be buying it. All these little details just complicate things far too much. I wonder if that’s why most people just choose 5 year fixed mortgages; why stray to the fancy products when you have something that works and is simple.

  3. The way I see it, if you NEED cost certainty to allow you to budget accordingly, you should probably choose a fixed rate. If, on the other hand, you have some flexibility in your budget, odds are fairly good that a variable rate mortgage will end up being the better choice in the long run.
    Another rule of thumb I tend to follow is to choose the opposite of what is being marketed heavily. If banks are advertising great fixed rates, I’ll probably go variable while as if they are heavily marketing variable, it’s probably time to lock in. Banks are in the business to make money. They won’t advertise what makes them less money. Last year, fixed rates were being pushed heavily (through fear and uncertainty tactics) so I chose variable.

  4. My mortgage is up for renewal Dec 1 and I have a few options with my bank:
    4% fixed for 6 months
    5.3% fixed for 3 years
    5.55% fixed for 5 years
    I was leaning towards going with the three or five year option due to market uncertainty, but after reading your post wonder if I should think about going with the 4%.
    We have a modest but consistent income, but not a lot of room in our budget to handle a unexpected spike in the rates.
    Any thoughts?
    Thanks for the blog – I enjoy reading it!

  5. This is an excellent site for mortgage information! Many of the posters to this site seem to express a general preference for variable rates, even in this time of economic uncertainty. Is there a type of mortgage buyer who would be better off locking in?

  6. I have a hard time believing that variable rates below prime will return anytime in the near future (next few years). The ridiculously cheap short-term money that was available over the last 5 years did not take into account the associated systemic risk. Now, with Canadian real estate markets with little upside and a heck of a lot of downside, no lender is going to accept the same puny risk premiums they had previously. JMHO

  7. One problem with taking advantage of the variable rate offers is that should you ever choose to lock in, your lock in rate can be very high. No option then to shop around. If inflation hits, then interest rates will go up and the safer choice may very well be to lock in now at your best rate. Be safe, this is not the time to gamble.

  8. Variable rates below prime will return when they are profitalbe for the banks. Credit is tight at the moment, however steps are being made to free it up. Banks will compete for customers by offering the best rates including below prime rates to qualified persons.

  9. I wouldn’t really call having variable rate is gambling. I would call it selecting a choice base on the history and researches done by someone else. It is a gamble if you can’t handle a potential 2 – 3% rate hike. But 2% rate hike will make prime at 6% and if you have variable with discount off prime, you’re ‘finally’ paying the same as the current fixed rate. I don’t know, but I am liking my rate right now. Who knows though, we might be approaching the once in a while time where fixed is better than variable. I feel that we’re not there yet, but probably very close once all lenders do what TD does: prime + 1%. They are predicting another rate cut after all.

  10. For those lucky enough to get at VRM with prime minus something then you are paying less than 4% so you have 2+% leeway before you even start paying the same as a fixed and with rates likely to decrease in Dec. you may end up paying 3% or less.
    If you are shopping now then it probably makes sense to get a fixed because interests rates might go down in Dec. but there isn’t too much room to go down.
    Basically for every month that you have a x% discount on a FRM it balances out those hypothetical months where you start to pay fixed+x%.

  11. Actually, a month of low rates (e.g fixed rate – x%) nets you more than if rates were to rise an equivalent amount above that fixed rate, thanks to the magic of compounding.
    More reason to go variable, provided you can get it a decent rate.

  12. Hi DayLate: As long as it’s fully open you should generally be good. In terms of features you might find it worthwhile to check out National Bank’s open All-in-One. It’s about the same rate and they have a ton more perks. Any mortgage planner can give you more info if you need it…
    Hi Traciatim: You’re absolutely right that no one knows whether variables will outperfom fixed rates in any given 5-year span. You’re also right that people get frustrated and simply choose fixed rates most of the time. That said, we do have past stats to rely on. So if you’re a numbers guy in a good financial position, and willing to surf the rate waves, variables will most likely be your best bet.
    Patrick: Love contrarians. :-)
    TC: Knowing nothing more about your situation, it seems like you’d be safer in a fixed. Give us or any planner a call and we can run through some scenarios to confirm…
    James: We use IDEA as a starting point for sizing up people for variable-rate mortgages. IDEA is an acronym we created that stands for:
    > I-ncome (the size and stability of your income)
    > D-ebt ratio (the lower the better)
    > E-quity (in your house…the more the better)
    > A-ssets (what can you sell if times get bad)
    If someone has a good IDEA factor, and they’re not highly risk averse, they’re generally more suited to a variable. Otherwise, it’s usually better to lock in some or all of their mortgage.
    Whistler: It looks grim right now but once lenders’ margins bounce back it won’t take long for someone to break ranks and offer a discount to prime. How long will that take? My guess is no better than yours unfortunately. :(
    Dan: That’s why you’re better in an open variable if you can get one near the same price as a closed. Regarding inflation, there’s not too many 5-year spans when inflation hasn’t hit at some point. The question is, when it does hit, will prime go up far enough, and long enough, to erase the advantage of a variable rate. That’s the risk, but it’s an educated risk.
    Saverio: True.
    Kyle: Thanks for the note. It seems that for most folks, history is always “different this time.” That’s why fixed mortgages generally outsell variables 3-1–despite the research!
    Hi Doug: Not sure I understood this, sorry: “it probably makes sense to get a fixed because interests rates might go down in Dec.”
    Hi Al: True…!

  13. Canadian Mortgage: I think Doug meant to say that with rates being as low as they are now, there isn’t a whole lot of room left for them to go much lower. Taking that in consideration, and the fact that current variable rate mortgages are now being offered at Prime + % for the most part, it might make sense for current mortgage shoppers to look at a fixed rate since VRM is probably approaching its lowest point. The reward for VRM is starting to shrink and the risk is starting to grow.

  14. Hi Patrick,
    Thanks for your note. Most people feel the exact same way. In other words, that “prime can’t drop much more so why go fixed?” In fact we’ll likely do a story about this soon.
    Here are a few things to consider…
    * Variables are definitely not for everyone
    * There are still variable rate mortgages available at prime rate for those who want them
    * That makes the average 5-year fixed/variable spread 1.50%. That’s a big difference still–despite the shrinking variable discounts lately.
    * Most economists have little doubt that prime will go up in the next five years. The real question is, where will prime average with respect to fixed mortgage rates. If long-term trends hold true, it will fluctuate (up and down) but average out lower than today’s 5-year fixed rates.
    * The next question is, how long does prime keep going down in the Bank of Canada’s current rate cutting cycle. Does it go down to 1.25% like it did in Japan in 2006? Highly unlikely. Can it drop to 3.00% or 3.50% and stay reasonably low for a while (long enough to ensure the 5-year average remains below today’s best fixed rates)? It’s quite possible.
    The truth is, probably no one in the world knows what rates will do. All we really have to rely on in choosing between a fixed or variable is the research available and the client’s personal situation, and every case is different!
    Cheers,
    Rob

  15. Great article, and thanks for the research link.
    One thing that seems missing from the discussion is the affect of the global credit squeeze, where the rate banks paid each other increased (I think it reached 6% in the UK in September until the Government stepped in).
    Shouldn’t this cost be considered when weighing VRM vs. 5 year fixed? It seems very unique if you scan mortgage rates over the last 50+ years …. Since the majors are all public companies and are accountable to their shareholders, I can’t see them eating this cost for very long.
    Is this something that should be considered?

  16. Hi,
    Whether you are going for FRM or ARM, you need to have a good Credit. If your credit score is more than 680, then you should get approved with affordable rates and terms for a home loan.

  17. “Shouldn’t this cost be considered when weighing VRM vs. 5 year fixed? It seems very unique if you scan mortgage rates over the last 50+ years …. Since the majors are all public companies and are accountable to their shareholders, I can’t see them eating this cost for very long.”
    exactly what I feel….VRM are not passing on the savings to customers no matter what the BOC is doing….this why I chose to fix in at a 4.95% for 5 years…pretty good…I think…I may have saved a some in the early run by going VRM at prime+1 (with no discount to be had) or a 1 year fixed at 4.35…but if things get really bad then who is to say that the banks will pay up these savings to customers?….Since it is my first mortgage I am being conservative….we’ll see if I chose well.

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