Front-Loaded Variables With Martin Shao

Front-Loaded-Variable-Mortgages With the Bank of Canadapromising” a low overnight rate until 2010, many homeowners are considering taking out variable-rate mortgages for a year and then locking in.

We spoke with Martin Shao, President of Valueland Mortgages, about how front-loaded variables fit into this picture.  Our chat follows here…


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.

  1. Good interview. If I were playing the float-N-lock game I’d go with a teaser rate too. On the other hand, fixed rates are on their way up so Martin’s point about rate uncertainty will probably come into play. T.

  2. Great idea to save for a year, but you have to weigh that against the super high rate you will lock into in 2010-2011. Variables don’t make me nervous but variables in this economy do.

  3. @Adam – “super high” rates in 2010-11 are not a fait accompli. As has been noted over and over again on this site, no one can consistently predict interest rates with reasonable accuracy.

  4. Buyers that take a 5 year closed variable planning to switch next year will experience the following:
    – payments will go up when they switch
    – outstanding balance will be higher after 5 years than if they took a fixed rate now
    – total payments and interest paid during the 5 year term will be higher.
    Here is a detailed chart showing the tradeoff between a 5 year fixed @3.72% vs. a 2.85% closed variable with a switch next summer.

  5. Hi Roger, Thanks a lot for the post. I haven’t had a chance to run through your figures but they intuitively seem to make sense. 4.50% or more for a 5-year fixed seems very realistic in 12 months. I too (and Martin too for that matter) have doubts about variable rates. In most cases they don’t seem to make a lot of sense (risk/reward-wise) at these levels. But some people are still adamant about them. – rob

  6. Rob,
    Thanks for the feedback. I find the banks and realtors are pushing the variable and switch to customers. It is attractive because of the lower monthly payment compared to a five year fixed. But its is a real TRAP for those folks who are financially tight. When they switch (and they will have to eventually) they will be really shocked at the new payments.
    These teaser rates are exactly what got the US in trouble. If people can’t afford to buy at 5-6% fixed they should not be buying. Five years passes quickly and rates will be back to historical levels then.

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