Variable Rate Mortgages: Are They Right For Me?

In today’s pandemic “New World”, Sean Howard and I continue to discuss the new dynamics in today’s Canadian mortgage market. Our goal is to share our thoughts and education as if we would want to know and if our roles were reversed. We will touch on the hot topic of variable rate mortgages. Variable rate mortgages or ARM [adjustable rate mortgages] are what today’s clients are enquiring and seeking during this period. We will discuss the history of this product since 2000, the perceived value and the psychology of the bank in helping potential mortgagers decide if this is the product for them.

History

The Canadian mortgage rate market really changed after the year 2000. The .com stock market crash and 9/11 events change the economy. Robert Floris’ Mortgage Architects office were early adopters to a new product called variable rate mortgages. The product was unique in that it would drop if the Bank of Canada lowered its overnight interest rate. During this time period, The rate was close to 6%. We begged our clients to take a slight risk as we felt it had nowhere to go but down during these chaotic times. We were right. Imagine that. We say this not to be boastful but to share how happy we were for our clients who ended up saving thousands upon thousands of dollars. Not many financial institutions had variable rate mortgages at the time, but that has certainly changed.

In today’s variable rate environment, all Canadian banks and mortgage lenders include the ARM or variable rate mortgage products. It is safe to say it has become mainstream. However, are we getting value from the product? Well, let’s examine this together.

Recent History

In recent history, the Bank of Canada‘s overnight lending rate climbed in 2017 from 0.5% to 1.75% in 2018 and held there for several years until the pandemic. However, the most important element of variable rate mortgages is the discount. In 2018, clients were getting high ratio mortgages with discounts like prime -1%. In 2019 prime was 3.95% less 1%, that is not a bad rate. But today where prime is 2.45%, this same product now means you are enjoying a mortgage rate of 1.45%. Wow! That was then, this is now.

Now the banks have these beautiful prime rates. However, the ever popular discount has been reduced greatly or eliminated completely. One major Canadian lender actually added a premium. What does this mean? Your rate would be prime +0.2% or 2.65%. The value of the variable has been eliminated.

What are thoughts, opinions, forecasts for the future of rates? Well, we really do not foresee rates changing for at least a year to 18 months. Thus, if you are lucky enough to have a variable rate with a deep discount, congratulations, you have won a mini lottery. Stay the course, you will be happy.

If you are purchasing a home or are considering refinancing, then your choice of mortgage products just got a little more difficult. Unless a mortgage lender is offering a deep discount on a variable rate, then I suspect a fixed rate must be considered. Let’s take an example:

Sarah‘s mortgage is maturing and she feels certain she will be staying in the home for the next five years. These are her choices:

1. Variable rate mortgages option: her current bank is offering a rate of prime or 2.45%.
2. Fixed rate mortgage option: her same current bank is offering her a five year fixed rate of 2.79%

Sarah‘s thought process must be first determined. If she will worry and is scared of variable rate mortgages, then the bank spread between the fixed rate and the variable rate of 0.34 of one percent is minimal for her mental peace of mind and stability. As well, as compared to the years in the early 2000‘s, rates have nowhere to go but up in the variable arena. Again, we strongly believe the Bank of Canada rates will not escalate for a long time, then Sarah can explore transferring her mortgage at maturity to a financial institution with a deeper discount so she can enjoy the lower rates At that time.

In our final review, variable rate mortgages have the perception of greater value with the news highlighting the rate drops. In reality, the mortgage lenders have taken away the rate discount premiums to preserve their profit levels. Thus, the bank spread between a five year fixed rate and a current variable rate has really narrowed. Again, if you are lucky enough to have the discounted variable rate product already, then I toast you for your good fortune!

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

If you would like to apply for a mortgage online, please follow this link.

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For more information on variable and adjustable rate mortgages:

Adjustable Rate Mortgage: Advantages

 

How l would approach a variable rate today