Rate Uncertainty & Ben Tal’s Call

Fixed-or-Variable-Mortgage-UncertaintyChoosing between a fixed or variable mortgage can seem like throwing darts with your eyes closed.

Borrowers today are seeing headlines like this:

Economists want BoC to keep raising interest rates

Then they turn the page and see this:

Could the Bank of Canada be forced to cut rates again?

Even the Bank of Canada’s Mark Carney isn’t too sure of the future.

On CBC yesterday Carney said, “Upside risks are balanced by downside risks…The upside is as likely as the downside.”

Benjamin-Tal At a FirstLine Mortgages event yesterday, CIBC economist Benjamin Tal translated that. “What Carney is telling us,” Tal said, “is (the Bank of Canada) has no clue what is going to happen.”

Tal added:

  • “The bond market is pricing in inflation below 1.50% for the next ten years.” (But he believes “the bond market is mispricing inflation.”)
  • The Bank of Canada now predicts the economy won’t reach its full potential until year-end 2012, one year later than previously expected.
  • The BoC doesn’t need to raise rates to slow consumer credit because “it’s already happening.”
  • Consumers’ spending capability is at a “30-year low.” It won’t take many rate hikes to slow the economy from here.

As a result, Tal asserted: “I don’t expect (variable or fixed) mortgage rates to rise in any significant way in the next 12 months.” There is “no rush to make a mortgage decision.”

When someone in the audience asked him which mortgage he’d take today (fixed or variable), Tal replied:

“I’m almost convinced that over the next 2-3 years variable will be better. In the last two years fixed will be better. But, the gap (between fixed and variable) will not be significant over five years.”

That said, if he had to choose today, he feels that “mathematically speaking,” variable-rate mortgages will “probably” outperform fixed rates.

  1. Despite all my efforts & research it would appear that I jumped to quickly at 3.54% fixed for 5 years last month instead of going variable. It now looks like it wasn’t the smartest of decisions. Very frustrating.

  2. So Denis; when experts like Rob Mclister and Mishe Milevsky say that it is next to impossible to time the market, did you think you were smarter than them?

  3. No one should be complaining about 5yr fixed at 3.54%. Talk to people 45Plus…ask them about rates they paid, maybe you will lose some of that frustration.

  4. I went with open Variable Prime -.75 back in September 2008… I have always been variable. I know there are a few times that it doesn’t pay to go variable but they are very few. I have 2.5 years left on my current mortgage and am glad I went variable. Fixed is nothing more than paying extra $$$ as an insurance policy in case rates go up. I don’t see another rate hike until at least spring 2011 and we may even see a .25 cut although I expect the Central Bank to just hold steady.

  5. The way the rates should go is down so that the people are willing to part with their savings by investing in the economy so that the dreaded R word does not get out of hand.Keep the wheels turning or else we might see the same situation like US.

  6. No sir, I am the first to admit that my knowledge in this area pales in comparison to others. I think what led to my decision was less about my stubborness and more about the wealth of varying information out there and essentially taking the more conservative/safer approach. I had managed to make huge inroads on my Prime -.30 over the past couple of years and didn’t want to get to greedy. In doing my research I read the Milevsky article several times it just seemed there was always somebody else saying this time could be different. My loss.

  7. Denis 3.54% is one of the best fixed rates ever! Don’t feel bad for one minute. One never knows what could happen in a year or two. You could easily be patting yourself on the back for locking in so low.

  8. I locked in Mar 31/10 at 3.75% for 5 years. This week I decided to pay the $2056 penalty and refiance the mortgage for 5 years at 3.28%. My rational was that I will save appx $4987 – $2056 = $2930 or about $50/month

  9. Hi Denis,
    Thanks for the posts. I think your experience is representative of a wide swath of consumers.
    Despite your last sentence, you haven’t lost yet. I’d echo Jim’s comments above about the future not yet being determined.
    While variables have proven themselves over the long-run, they’re not always cheaper over five years, and they’re not always the best fit for everyone.
    You’ve got a fantastic rate that will provide mental comfort as rates start ticking higher in coming quarters.
    Cheers,
    Rob

  10. people complaining about a 3.54% rate are just being ridiculous! These are emergency once in a lifetime low rates right now. There has NEVER been another ocassion ever with such low rates. Yes, they could last another year or 2 or even 3 but at some point rates are going to rise and when they do, they may not stop at the level of the last cycle but could go to 7, 8, 10% easily.
    Why? Because the western world hasn’t had to deal with real inflation for a long time and with all the stimulus being pumped into the economies its only a matter of time (in my opinion). So, relax and be hugely thankful that you’re in a super super low rate. I’m still locked in at 5.7% (thanks to Firstline MOrtgages for that) for another 2 years. I can only pray rates haven’t soared before then so that i may re-finance at a lower rate than i have now.

  11. I agree with Benjamin Tal and it’s something I’ve been saying for a while. Canada’s economy was indeed doing much better than the US and even most European economies. The problem is that despite our strong financial position, our biggest trade partner is the US. As long as the American economy remains anemic, they will drag us along for the ride. Prosperity is gradually shifting from the old world western powerhouses, who are heavily indebted and where consumers remain highly leveraged, to emerging powerhouses who continue to grow strong and are flush with cash to make enormous acquisitions. What does this tell us? It tells us that investors in the west are more nervous than ever about what’s happening. This would translate into potentially low rates for some time to come. If someone like Mark Carney can’t figure out where things are heading, the average Canadian sure as hell won’t.

  12. Are you 100% positive thats 3.28% for a 5 year fixed for the full 5 years and not just the rate for the first 9 months to 1 year and then the rate is higher for the remaining term? 3.28% is a 2% discount off the posted rate.

  13. I am sure. The Advisor send in for an exception to earn my business and it is 2% off posted, 90 day rate gauarantee and 20% prepayment, so full featured mortgage.

  14. I think that anyone going with a fixed rate at this time is making a mistake – paying way more in interest than they could be paying. For someone with a mortgage with more than 100K this is hundreds of dollars a month thrown out the window. I had a mortgage sine 1993 and always variable, and it is a joke how little I pay in interest. This has allowed my family to enjoy 1-2 month long vacations in Europe every 2 years. Even during Quebec referendums in the 90’s I did not lock in long term when rates jumped 3% in 1 month – they came down even lower as fast. People – go variable with your mortgage and the money you save in difference between that and a 5yr closed should be put asside in a TFSA account (you know what that is, right?) and if after 1 year you feel good about how you are doing go on a nice vacation with your family. Because if you take a 5yr closed mortgage your banker is going to take that vacation instead. Going variable (currently 2.25%) is no brainer because you are saving $105/month for every 100K of your mortgage ammount compared to 5yr fixed rate at 3.5%. And since so many people have mortgages in a 300K range (based on bank’s info) this could be $300/month less in interest. This website is excellent – keep checking once weekly what’s new and enjoy your savings.

  15. Hi Grant,
    I believe you could have taken a variable rate at 2.25% (prime -0.75% currently) and that’s for 5 years. Or you could have done what I did – take out a 1yr closed at 2.2%. That is much better since after only 6 months you can change it to some other term without penalty (every mortgage can be changed without penalty in the last 6 months of its term). So you see how flexible this is, and to top it off it gives you the best rate possible – on the whole planet right now. It would save you about $220/month in interest payments ($2600/yr). It’s huge money to me. I am with Scotiabank and negotiate all terms myself – I don’t believe in brokers since I get exactly the same rate (this website tells you up to the minute how low banks will go, so I just ask for it and get it). Good luck.

  16. LOL. Drazen you just demonstrated why you do need professional advice.
    For one thing, this statement of yours is just plain wrong:
    “every mortgage can be changed without penalty in the last 6 months of its term”
    Where on earth did you get that information??
    You are also admitting to timing the market. That is a rookie strategy. The odds are high that you will mistime locking in.
    Lastly, your claim to fame seems to be that you can negotiate the best rate yourself. Rate is just one facet of a mortgage. There are so many ways a mortgage can cost you money that are unrelated to the rate.
    Secondly, you didn’t even get the best rate. I know brokers who have had better than 2.20% for weeks.
    I guess what I’m saying is, don’t be so dismissive of professional help. It costs you nothing and can obviously save you from making expensive errors in judgment.

  17. hello
    I am a 1st time nuyer looking to buy a property as an investment. I want to rent it out to a tennant. What should I pick as a 1st time buyer? Variable or 5yr fixed?

  18. Thanks David.
    My concern is the rising rates in the next 6 months to a year. I dont want to be in a situation where i’m forced to lock in at a 4% or perhaps more down the road just for the sake of affordability..
    Also, is there a reason why I would not qualify for a variable rate as a 1st buyer? My credit is good

  19. – You can prepay up to 20% of your original principal mortgage amount annually*
    – You’ll get up to $200 towards your financial institution’s transfer-out fee**
    * Non-cumulative and does not apply if you prepay in full.
    **Transferred mortgage must be from a lender approved by CIBC. Prepayment fees and other charges from your existing lender may apply. Additional conditions and restrictions may apply. Ask for details.
    That is cut and pasted from my contract with them.

  20. I have two STEP mortgages with Scotia which renew in Feb and July of 2011. My plan is to pay off the Feb mortgage at renewal with the available credit from the other STEP mortgage and combine them in July when I renew. When July comes around, I’ll have about $85,000 left.
    I’d like to just renew with the STEP variable but it looks like five years is a requirement on variables and I’d like to pay this off much sooner than that. Are there other options for variable that don’t require five-years, or when the mortgage amount gets low do you have to switch to fixed to get a corresponding term?

  21. I have a number of rental properties also and I always go Variable at the start. If conditions change, you can lock in with no penalty. This doesn’t work the other way around: you can’t go fixed and then variable without penalty.
    You might want to check on the economist forecast for 5 year bond yields, but I don’t believe 5 year fixed are going back over 4% for a while (at least next spring). People who locked in in the spring would have felt the same way you do now, but go talk to them now and they’d wish they had stayed variable (I was one of those people :) I could have enjoyed 6 more months of variable and an even lower 5-year fixed.
    On top of that, not all VRMs require you to lock into a 5-year. Firstline, for example, lets you lock in at any fixed rate of 3 years or longer. Therefore, even if 5-year rates rise half a point you can lock into a 3-year fixed at about where todays 5-year fixed are.
    I wasn’t suggesting you won’t qualify for a VRM, just that it is harder and you’d get approved for less money in that case. I guess it really just depends on your risk tolerances. Once you obtain more than one property you can have a mix of fixed and variable (which I do) which is a lot more comforting.

  22. Got some good news for everyone – TD has cut fixed rates in the 1-3 year range … the 1-year posted goes down 20 bps to 3.20%, the 2-year and 3-year rates also dropped.

  23. How do people generally shop for mortgages after an offer has been accepted but before the financing condition has been waived? Do people keep shopping for mortgages right up to closing?
    My broker has given us a preapproval of 3.59% for a 5 year fixed expiring in February 2011. I’ve been told that pre-approval rates are not as good as quick-close rates – so should i expect to get a better rate if I have a closing date in the next 30-90 days. I see folks mentioning 3.39% and 3.49% for a 5 year. Are these for quick closes or pre-approvals. If these are for pre-approvals then maybe my broker is not doing a good job?
    Also is it ok/common to waive a financing condition and continue to shop for rates with different lenders right up until closing?

  24. David, every mortgage term at Scotiabank is fully ‘open’ in the last 6 months, be it 1 or a 5 yr term. You can then convert to anything else you want without any penalty. Closed 1yr discounted rate at Scotia was 2.2% a month ago and I took it – I don’t time the market, I only play by choosing the chipest option. Some broker might have offered 2.1% instead but that’s peanuts – would you drive 5 blocks more just to save 1cent/liter on gas? Because by dealing directly with the bank I also got a discounted rate on my line of credit, and some additional investment advice. I have a feeling that you might be a broker yourself – you did not provide any facts to counter my numbers? Anyone would be wise to just grab the lowest rate with the lowest term right now.

  25. Grant, I am guessing that you can’t change anything now since you are locked into a 5yr rate, and interest differential is not that big to warrant breaking it, paying penalty and going to VRM (some people do since penalty is very small and savings with a new rate are much higher that penalty). If you instead took 1yr closed mortgage at 2.2% you could have converted it after 6mo to something else if situation changed in the meantime (remember – last 6mo of every term is ‘open’).

  26. Julie, I have a STEP mortgage at Scotia and last month took a 1yr closed at 2.2% (I’m at 80,000$). VRM was same rate but required me to lock in for 5 years which I don’t want. Remember – 1yr rate is ‘open’ after only 6 months and you can then change it if you want again to something better at that time. That’s my suggestion for you also. Good luck.

  27. Drazen,
    It should be clarified that in most cases the last six months of a term are not fully open.
    You may find a few lenders that allow the borrower to early-renew into one of that lender’s products in the last six months, but that is not a true definition of open. An true open mortgage allows you to switch lenders without penalty. That is not the case with Scotia’s closed mortgages until maturity.
    Rob

  28. I got a fixed rate mortgage at 3.69 last year with FirstLine when it seemed like rates would only go up. Obviously not the best decision in hindsight. Any way to lower that pain now? Pay off mortgage with HELOC perhaps?

  29. Guys, TD has quietly cut some posted fixed mortgage rates today.
    The 1-yr is down to 3.20% and the 3-year is down to 4.00%
    It’s now reflected on their site.

  30. I don’t sign till Friday. They offered me:
    VRM P – 80bps
    1 year 2.2
    2 year 2.35
    3 year 2.90
    5 year 3.29
    I decided on the 5 year knowing that I will pay more in 1st 18 months but save in remaining term and that will equal about a 30bps saving in my estimates.

  31. Absolutely. Play as many hands as you can and you’re more likely to win in the end.
    Your broker probably won’t like it, but think of his preapproval as a “safety net” in case you can’t find anything better. You’re always taking a chance when waiving a financing condition because preapprovals aren’t contracts. A lender can cancel a mortgage commitment if they find out something was wrong on your app or you can’t verify something. So as long as you crossed your t’s you should be fine.
    I once applied for a mortgage 10 days before closing and it funded in time no problem.

  32. Dan,
    Royal and BMO have been at 3.20% on the 1 year and 4.00% on the 3 year for some time now, so not really a revelation that TD is finally matching.

  33. d.Knox-I monitored this website every day for updates on best discount rates offered by brokers and banks about a month before I had to renew. I asked my bank for best rate they can offer me and it was 2.2% for 1yr closed, or VRM at prime-0.75% (but that required locking in for 5 years). Again, this site suggested 1yr rate and I took it since at Scotia the last 6 months of every term is ‘open’ meaning you can, without penaly, change mortgage to something else in those last 6 months. There is no reason for me to switch lenders since this one offers best deal currenntly available on the market. Maybe I am one of their better customers since all my investments and accounts are with them (well, not all, but keep quiet). That’s why switching lenders is not always the best option (unless you are getting a killer discount, not some meassly 0.1% better rate). Never look at posted rates too much – you have to go to your branch and talk to them in person. Good luck.

  34. I never saw a reason to change lenders since they are all competitive, and staying with one and being loyal pays off (just like auto insurance and other stuff). All you need to tell your bank what is the current best rate offered anywhere (as reported daily by this site) and they’ll more likely match it to keep you. When they see that you are informed and willing to give them a chance you’re in for a deal. Moving is always pain.

  35. Grant,
    yes, any savings is better than none. I still wouldn’t lock in for a 5yr term – as you see from other posts 1yr closed rate could be had for a 2.2%. Next year if rates do go a bit higher (most unlikely if you look at the mess we are in including the rest of the world) you can then change it to a longer term. It looks as rates might even fall down in the spring since Can dollar is too strong chocking export industries that we completely rely on for the recovery. Even my bank mortgage manager told me he is sure that I made a good choice going with 1yr rate (they just love people locking in long term – they make a killing on interest and don’t have to see your face that often in their office). I was giving this same advice last year to my friends at work and they all locked in 5yr closed rates instead – I found out they don’t know how to translate interest rate differential into actual $ savings. But good luck anyway
    (I have most posts on this article but I am just a regular guy, not a banker)

  36. Hi Drazen,
    Folks tend to go where they feel they’re treated the best. Depending on the individual, that may be a broker, bank, or a credit union.
    Everyone’s needs are unique and countless people find that their loyalty to banks is not repaid with the best rates, advice and service (which is why credit unions and mortgage planners exist).
    Most high volume brokers and many banks reps claim that they can match or beat virtually anyone’s rates. When it comes down to it though, the rate differential is usually small. When other things are left equal, it becomes more about advice (i.e. has the individual recommended the very best term and product at the lowest possible cost) and relationship (i.e. do you like and trust the person you’re dealing with).
    Your needs and background may be very different than others. But thank you for sharing your experiences nonetheless.
    Cheers,
    Rob

  37. Whether you have flexibility in your budget is a big factor in the decision between fixed and variable. If you need that insurance and can’t afford variable going to 6 or 7 or more, go fixed. If you can afford to take that small risk, go for it. One should probably try to pay as if the rates are 5% anyway as they are going beyond that eventually.
    Look long term where variable is mathematically better.
    This is one of many risks that I consider I self insure myself, just like declining excessive vehicle coverage (windows, for example, the front car window is under 800$, less than my deductible) and declining applicance and electronic extra warranties. If you decline all these all year and only have to pay a few hundred once in a while, you are likely farther ahead.

  38. If I can save $500 after all costs and get the same mortgage then I’ll change lenders. Moving isn’t that much of a pain.
    FWIW, I don’t think banks do you any favours just because you’ve been with them a long time. Their job is to make the most money off you possible. You have to haggle for every little discount you get in my experience.

  39. I can’t speak for others but I feel good about my 3.39% 5 year fixed. If 1 year rates go up just 1.20% my 5 year rate becomes lower. Five years is such a long time. So much can happen. I don’t get why anyone would take their chances just to save 1.19% today.

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