“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.”
That’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.
The 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
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