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Globe: Variable Rates Are “So Over”

For 10 years, I’ve said don’t waste your money on a fixed-rate mortgage. Today, I just cannot in good conscience put a borrower into a 3-per-cent variable when for the same rate I can put them in a four-year fixed.

Peter-MajthenyiThat’s mortgage planner Peter Majthenyi, as quoted in this recent piece by the Globe’s Rob Carrick.

Majthenyi is one of the most successful mortgage planners in the country, and (normally) a big variable-rate proponent.

When you get professionals like him calling it quits from variables (however temporary) you know there’s been a shift in planetary alignment.

In his story, Carrick starts off by saying that variable-rate mortgages are “so over.”

Indeed they seem to be…for now.

rate-trapThe exception would be if prime rate were to drop before it rises. Even a single 25 bps rate decrease in 2012 could permit an unalluring prime – 0.25% variable to outperform a competitive 3.29% five-year fixed (based on our purely rate-driven simulations).

By contrast, a 3.29% five-year fixed wins if rates stay flat and then start rising in 2013.*

Either way, the better play for most people continues to be neither a variable nor a 5-year fixed, but a 4-year fixed (if you can find one near 3%).

Even if the BoC cuts twice in 2012, a 4-year term keeps neck and neck with a variable over a 48-month span, assuming 150+ bps of tightening in 2013-2014.

If the BoC doesn’t cut rates, a 4-year could put you reasonably ahead of the game.

Let’s just hope lenders don’t keep lifting 4-year rates  (as they have been lately). They have a funny way of doing that kind of thing when consumers catch on to value. Maybe we should just keep quiet.  :-)

* Assumes 100 bps of hikes in 2013, OR 75 bps in 2013 followed by 50 bps more in 2014. Simulations are based on these standard assumptions.

Rob McLister, CMT