The 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.
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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.
Last modified: April 29, 2014
Greetings:
My question is, does your Variable Staitjacket analogy apply to Fixed vs closed variable or open variable as well?
The reason I ask is that I am in an open variable at 2.49% It has only been at “prime plus .24” since the last BOC announcement. Otherwise it was at prime during the crisis and before that it was prime minus like everyone else.
Like many people, I am wrestling with variable vs fixed rate, but my gut is telling me to stay variable. I just need to know where I fit in the larger picture.
Any opinion would be appreciated.
Thanks
I am in a similar position. Currently, I am in an open variable at Prime + 0.6%. I can lock in any time at no charge, but am questioning how to properly time my lock in.
Do I remain with the 2.85% until Prime starts to go up, or is now the time to lock into a 5 year fixed?
Any feedback is greatly appreciated.
Wow – what a horrible article.
Actual interest savings are closer to $410. I wish people in the financial services industry could learn to make apples to apples comparison – i.e. for the store credit card – currently it will be amortized in ~38 months. They are then amortizing over 25 years and using the reduced payment to make refinancing more attractive. Show the interest cost per month total, so borrowers can make an informed decision!
Hi Posterboy,
Just to confirm, can I assume you are talking about FP’s article and not our’s. :-)
-rob
sorry – yes the original article is horrible. Like most other items, yours was accurate and reasonable.
Hi Jim and DayLate…
Great questions. I’ll answer in a full post soon because they are questions worthy of wider discussion.
Give me a call if you need a quick answer in the meantime…
-rob