CMT: Martin, Thanks for being with us today. I noticed Valueland now offers a front-loaded variable at prime + 0.10%. Why is a front-loaded variable a good option in this market?
Martin Shao: According to our central bank’s last monetary policy, Canada’s overnight lending rate is expected to remain at a low level until mid next year. As a result, variable rates will remain low for about a year or so.
However, we expect elevated interest rates towards next summer. People with variable-rate mortgages can then choose to convert into a fixed rate.
Variable-rate discounts after that conversion period do not provide much benefit.
CMT: Okay, so in other words, a front-loaded variable packs the greatest discount in the first year. Given this, would you recommend that most well-qualified borrowers with sufficient equity choose a front-loaded variable, or a discounted fixed rate?
Martin Shao: My top recommendation is still for a low discounted fixed-rate mortgage. However, for those who would like to take some risk and save in the first year (when their mortgage amount is the most), front-loaded variables provide more savings up front.
CMT: What risk is there, over the next year, in choosing a front-loaded variable over a fixed-rate?
Martin Shao: The risks are associated with the general Canadian economy. If the economy turns unexpectedly better before next summer, variable rate takers would see a negative impact on their mortgage payments.
The second risk is the uncertainty of fixed rates when a variable-rate borrower wants to lock in his or her mortgage rate.
CMT: Last year, there were several lenders promoting front-loaded variables. This year there are almost none. Do you expect lenders will re-launch front-loaded variables anytime soon?
Martin Shao: With short-term rates stabilizing, lenders may re-launch this type of product in the near future to differentiate themselves. Even without lenders re-launching them, Valueland has started offering front-loaded mortgages in a different form.
CMT: That’s interesting that you’ve created your own version. Who would you say these products are best suited for?
Martin Shao: The deep discounted rate for the first year would be best suited for those who are almost 100% sure they will convert their variable rate to a fixed rate mortgage.
CMT: Excellent. Thanks again for the perspectives Martin.
Martin Shao is founder of Valueland Mortgages. Valueland has a highly successful Internet brokerage model and is based out of Markham, Ontario. Before he became a mortgage broker, Martin had an extensive background in financial services. He holds a B.Sc. and a Master’s degree in financial information management and has been one of ING Direct’s and INALCO’s top-performing brokers.
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