Variable-rate mortgage volumes have dropped off a cliff since last summer.
Most feel that variable rates simply aren’t low enough (compared to fixed rates) to offset the risk.
But what if there was a limit to that risk?
That’s Scotiabank’s proposition with its recently re-introduced Ultimate Variable Rate Mortgage (UVRM).
The UVRM gives you a starting rate of prime (3.00% today) and your rate is guaranteed never to exceed the “cap” rate. The cap rate equals Scotia’s 3-year posted rate at the time of origination.
Essentially, the UVRM makes you give up 15-25 basis points of discount compared to regular variable mortgages today. In return, you get assurance that your rate won’t increase more than 99 basis points (based on today’s cap).
The Ultimate Variable has a 3-year term. Its payments are calculated using the cap rate and they don’t change for the full length of the mortgage. If rates go up, you simply pay more interest and less principal—and vice versa.
Setting the payments to the higher cap rate lets you “significantly accelerate the mortgage repayment now, using [today’s] low rates to your advantage,” says David Stafford, Managing Director, Real Estate Secured Lending at Scotiabank.
“We don’t predict rates,” Stafford notes, “but if you think prime will stay low, or even decline over the next three years, then the UVRM is a great way to save money, accelerate repayment (because the payment is based on the cap), and it provides protection if rates do go the other way.”
The UVRM versus a Regular Variable
If you do choose this product, there are four scenarios that could unfold over the next three years:
- Prime rate falls
- Prime rate stays the same
- Prime rate rises 25-125 basis points
- Prime rate rises more than 125 bps
Compared to a regular deep-discount variable, the only way you save with the UVRM is if scenario #4 materializes.
In that case, the regular variable rate would climb to 4.25% or greater while the UVRM stays capped at 3.99% (based on today’s cap rate).
If you believe there’s an appreciable chance of prime rate rising more than 125 bps in three years, but you prefer a variable anyway, then the UVRM is for you.
Of course, if you’re sufficiently worried about a 1.50+ percentage point rate increase, you’re probably better off in a fixed rate. You can get an equivalent-term fixed rate today for 2.89% or lower, with zero upside rate risk for three years.
Other features of the UVRM include:
- Convertibility to a 3-, 4-, 5-, 7- or 10-year fixed mortgage at any time
- Optional 15% lump-sum prepayments
- Optional 15% annual payment increases
- A 90-day rate hold
- A 3-month interest penalty for early termination
The Ultimate Variable Rate Mortgage is available through brokers, Scotiabank branches and Scotiabank mortgage specialists.
Sidebar: Scotiabank is trying to get the word out about its “Mortgage-Free Faster” campaign which advocates making small changes to shorten your amortization.
To that end, Stafford says, “If you believe…rates are at or near the bottom, and not sustainable for the life of your mortgage, then you should make a payment that’s more reflective of historical rates.” Doing so helps you “avoid sticker shock if rates are higher when [your] next renewal comes up.”
“An extra dollar paid at the beginning is a dollar you’re not going to pay interest on for the next 30 years…The trick is to use [today’s] historical low rates to accelerate repayment. We may never have an opportunity like this again,” he noted.
“But even if rates do stay low, it’s not unreasonable to think you could be mortgage-free in 15 years (by) making a payment that our parents could only have dreamed of in 1981.”
Rob McLister, CMT