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The Variable Straitjacket

Variable-RatesThe Financial Post ran an article last week on a broker who sees “opportunity” in variable-rate mortgages.  It raised a few obvious questions, like:

  • Where’s the “opportunity?”
  • What are the alternatives?

For new mortgage shoppers, variables are nowhere near as enticing as they were 18 months ago. That’s because variable rates are driven by prime rate and bankers’ acceptance yields. The odds of either of those two things falling much further are minimal.

This, in turn, means that variable rates probably won’t improve unless lenders cut the premiums they’re charging to prime rate.  Most feel that will happen, but it could take 6-18 months or more.

So, if these probabilities are correct, why would anyone lock into a closed 5-year variable today?  Doing so puts borrowers in a virtual mortgage straitjacket.  It leaves little flexibility and traps homeowners in rate premiums that are well above normal.

Variable rates have historically been offered at prime rate, or a healthy discount to prime. Today, they’re at or near prime + 0.60%.

Instead of a variable, consider a good one-year convertible mortgage.  For one thing, they’re currently cheaper than most closed variables.  Moreover, the best one-year convertibles let you swap into a discounted fixed- or variable-rate mortgage, at any time, and without any cost.

You can also hold your one-year convertible for the full 12 months until maturity.  After 12 months, you’ll hopefully be able to secure a variable rate mortgage that is closer to, or less than, prime rate.


The Mandatory Disclaimer:  This is not a forecast or recommendation.  Rates are virtually unpredictable long-term.   Exceptions to the above do exist.  Although unlikely, it is always possible that the prime – BA spread will shrink in the next 12 months, and actually increase variable-rate surcharges. Market conditions can change at any time. Contact a mortgage planner for recommendations suitable to your particular circumstances.