“Things Have Changed”

Fixed-or-Variable-Rate That’s Desjardins’ conclusion regarding the long-held superiority of variable rates over fixed rates. 

Desjardins declared last week that it “must drop the time-tested assertion that a variable-rate mortgage is always the best choice.”

Based on Desjardins’ assumptions, it says “fixed-rate mortgages currently appear to be the least costly.”

This is just one institution’s opinion, but it nonetheless shines a new light on the popular variable-rate research, like that of Dr. Moshe Milevsky.  (For the record, even Dr. Milevsky has adapted his previous conclusions to the current market.)

Here are additional details from the Desjardins study:

  • Desjardins tested six hypothetical mortgage scenarios to reach its conclusion.  As a result, it says “a fixed five-year mortgage currently seems very attractive for many borrowers.”
  • Mortgage spreads have soared in the last year but Desjardins feels they “will come back down as financial tensions resolve.”  Even so, spreads “will remain significantly higher than before the [credit] crisis,” it says.
  • Desjardins Senior Economist, Mathieu D’Anjou, concedes the difficulty of predicting interest rates.  He asks, “Is a variable-rate mortgage still advantageous for a borrower? “The answer to this question depends on an unknown,” he says.
  • Variable rates today “leave little room for a discount,” according to D’Anjou.  “This is because financial institutions currently prefer granting fixed-rate mortgages rather than variable rate mortgages.” (because “financial market changes have made variable loans much more complex and costly for institutions to manage.”)
  • Desjardin’s predicts rates will be extremely low until mid-2010, then gradually rise about 4.50%. 

In sum, when choosing a mortgage Desjardins advises us to “think about more than the current (low) variable rate.”

  1. Makes sense. The Bank of Canada has only 1/2% left to cut. People who are holding out for this 1/2% are running a huge risk that rates go up before they can lock in.

  2. As always, future conditions remain unknown.
    However, unless the economy recovers VERY quickly and brings core inflation along with it, the Bank of Canada isn’t going to be increasing rates anytime soon.
    For people with existing variables, especially those with prime minus variables, some would be more than doubling their rate if they locked in. Given that a guanteed dollar saved today is worth more than a hypothetical dollar saved in several years, floating remains attractive.
    I’m at 1.55% and wouldn’t dream of locking in at this point.

  3. Hi Al,
    Thanks as always for the post. For someone in your shoes (i.e. a homeowner who’s already got a variable at a great rate) you’re absolutely right to let your variable ride–for now anyway.
    I think the Desjardins report is most applicable to someone who’s getting a new mortgage and deciding between a fixed or variable today.
    Take care,
    -Rob

  4. Does anyone other than Desjardins actually have the BoC rate jumping 4.5% in the next year?
    Seems a bit much . . .

  5. Hi Bob,
    It does intuitively seem high. I agree.
    Thus far, I haven’t seen anyone else this hawkish on mortgage rates.
    For what it’s worth, Desjardins’ study seems to call for the hikes to start mid-2010 and take two years to rise 4.5%.
    Cheers,
    -Rob

  6. Thanks Rob.
    The most accurate thing that could be said about the current economic environment is that there is a significant degree of uncertainty regarding the outlook.
    It would be extremely difficult for any forecaster to nail interest rates one year out from now, let alone 2 or more. Best to treat all forecasts with a healthy degree of skepticism at this point.

  7. – House prices falling
    – oil price decimated
    – Job losses mounting
    – Frugal is once again cool
    – Wages stable or decreasing
    – Most important…peoples attitudes have changed from over consumption to saving.
    This is all very deflationary and nowhere do I see inflation returning anytime soon.

  8. And even if variable goes up, isn’t it possible that banks will bring that prime minus products back, I think they can, or will at least they will go from prime plus to just prime. Just a thought…

  9. CIBC offered 4.29 today for a 5 year closed………not that I’m interested. I’ll stick with my variable…….

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