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

  1. What is the upside of a variable mortgage today? A quarter percent savings in the beginning? I can’t see how it is worth it.

  2. Ok I posted this comment but it didn’t show up. I am posting this again…if it shows up twice I apologize.
    So what is the best rates now? I have seen 2.99% for 4 year fix and p-0.2 for 5 year variable. Are these the lowest we can go?
    Thanks guys

  3. The disadvantage of fixed mortgages is simple. If you break the mortgage, it usually triggers the higher, IRD prepayment charge instead of 3 mths simple interest that most Variable mortgages charge. This is usually still the case even if rates were not to change during the life of the mortgage because the posted 1,2,3 year rates are nearly always lower than the 5 year mortgages and depending on how much time is left on your fixed mortgage, it’s those posted rates that the bank uses to calculate the IRD penalty.
    Anyone who has spent more than 5 minutes browsing this site knows how strongly most consumers feel about having to pay large prepayment charges.
    As a sidebar, IMO, I am not convinced just yet that P-1% variables are gone forever. Time will tell!

  4. Agreed with banker. I wouldn’t write off variable rates as there are still advantages over a fixed rate mortgage. Once the economy start picking up again, both rates will rise with the exception that fixed rates will remain locked while the decrement of variable rates may decrease again as the volatility subsides. Remember, at the peak of the financial crisis in 2008 people said “say goodbye to prime – 1% variable mortgage” when in fact up until 3 months ago we were actually very close to prime – 1%. I would tune out the noise and go with whatever suits you best. Trying to gauge how well you would come out in the future when comparing the two is like grinding water because we can’t control where rates will go. I’d rather focus on things I can control as oppose to things I can’t control.

  5. We all know the 4-yr 2.99 fixed rate is better than p-0.25 rate. But how about compare 4-yr 2.99 fixed rate to 5 yr p-0.5 VMR? Is it still a clear choice to go with 4 year fixed than 5 yr variable?

  6. Hi Lior,
    Thanks for the post. At some point, variable will again be the optimal choice (once prime increases and/or variable discounts improve). Most avid rate watchers understand that.
    As of today, however, people getting new mortgages are faced with an unusually tight spread between fixed and variable and the potential of rising rates 12-18 months out. That requires a re-analysis of the historical interest-cost advantage of variable rate mortgages (it’s worth repeating that basic interest savings is the only factor this story looks at).
    You made a point about going with “whatever suits you best” so that raises the question: “What suits a person best today?”
    To determine that, one needs to do the normal fact finding with each client individually (i.e. a proper consultation, financial review, etc.).
    Beyond that, however, it is possible to gain additional insight by quantifying the potential cost differences between terms, given certain assumptions, historical trends and future expectations.
    In our experience, folks appreciate understanding “best,” “median” and “worst-case” cost comparisons, even if they’re tied to specific assumptions (which they clearly must be).
    No one can foresee the path that rates may take, but running sample amortization scenarios gives people a base case understanding of potential risk versus reward. That gives them one more clue with which to determine suitability.

  7. Variables are a gamble, betting that the rate will go down. With the prime being as low as it is, it would be wise to assume it has nowhere to go but up.
    That said, the savings felt at the beginning of securing a variable, coupled with the predictions from some that the rates will hold steady for a while, variables are not fully off the table yet.

  8. Hi Rob,
    I absolutely agree. The only way one can make an informed decision in a situation like that is running a series of “what if” scenarios with hypothetical amortizations and rates to determine whether the premium of a fixed rate in today’s times is attractive enough to lock in.
    With that said, fixed rates have limitations beyond the rate that consumers should also consider when making their decision (for example – Banker’s point about potentially paying a costlier IRD, the cost of which is a lot more tricky, if not impossible, to factor into risk-reward calculations).

  9. Against the backdrop of a low yield environment, the banks have ZERO interest in bringing back the discounts in the VRMs’. It is called “MARGIN”…
    Banks control more than 60% of the mortgage market and hence the pricing as well…why would they screw up a good time?
    The losers? Homeowners and brokers.
    TD, RBC and BNS have been increasing their MDMs.
    Brokers…smell the coffee and STOP sending deals to the big 5!
    This has been planned all along.

  10. given the prognostications of our so-called experts in the last 18 months, I simply tune these guys out.
    However, for what it’s worth (not much) go variable no matter what. Ask me why? I don’t have a red clue.

  11. Ok just heard the 2.99 at 4 years fix is gone from many banks. This rate is on 3 years now. So if someone likes this fix rate, it is better to lock it down if you can still find it.

  12. There’s not much to say other than what I’ve stated. I’m just as much “on spot” as you are except I don’t need to get into technical analysis – which really is meaningless. Basically guys like you spew a lot of white noise just to be heard.
    Save it.
    Merry Xmas!

  13. @66wow99
    “…spew a lot of white noise…”
    This coming from someone who claims to have “nothing much to say”?
    Who said anything about technical analysis?
    Again…bring it; let us allow the truth to get out!
    That is right…you got nothing meaningful to provide! lol lol lol
    FACT: it IS about margins!

  14. Banks are a business and they are about making money as any other business is. It is a simple fact. There is no “Free Luch”. Just use a Broker/Other to finance your mortgage and specify that you do not want to use the oligopoly Banks. The choice is yours. No Oligarchy in Canada Yet. Correct me if that is wrong.
    Currently hold a VRM. P-0.5 and not a banker or broker

  15. I signed a 2-year fixed at Scotia at 2.49% (and luckily signed the other half at p-.85% just before all the banks tightened up on variables).
    Even with a 4-year fixed at 2.99%, I think the 2.49% is the better deal since I can renew 6 months early penalty free and I don’t see rates doing much of anything over the next 18 months – BUT if they do, there is a good chance the spreads on the variables will begin to widen again and I can lock into a variable at that time…. Time will tell I suppose.

  16. I think what I read from Rob’s comment was that:
    1) peter, who has been the ULTIMATE supporter of going variable over the last 10 years (probably 20 yrs) despite its up and downs, with sometimes being a lone voice, has expressed that this decision is no longer an auto decision
    2) and that with Peter potentially earning less commission by suggesting a client away from a variable ( 5 yr) to a shorter than 5 year fixed
    that with these two factors, (despite the defending-turf arguments of above), that for most of us, not making the huge income of the Peters of the Mortgage World, we should perhaps pause in providing the “best” mortgage option as an absolute fact, backed up by gobbledy gook.

  17. For a P-35 5 year closed VRM give me a call.
    [Edited. Thank you for the post. We ask that brokers do not post contact info in their posts. Otherwise the site would be overrun with promotional messages. Licensed brokers are welcome to link to their name, however. Thank you for your understanding. – Elizabeth, CMT]

  18. I don’t know, variable rates look pretty good with the new predictions today that the rate is going to fall to .25 next year.

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