FROM OUR MORTGAGE ADVISORS/BROKERS

Variable Mortgages are changing in Canada … heads up!

It looks like over the past ten years too many of us have enjoyed the savings of five year variable mortgages which is not sitting well with most Banks. Did we spoil a good thing? With about 65-70% of new consumers now opting for a variable rate mortgage the lenders need to adjust their strategy to become more profitable again.

Historically, mortgage lenders enjoy healthy returns on a basic five-year fixed term that our parent’s generation had to take for the most part. Our generation enjoys access to better information, and fierce competition; this combination has benefited borrowers while eroding mortgage profitability for the all lenders. It doesn’t take much time on the internet to quickly conclude there are currently 52 mortgage lenders ready to throw themselves under the bus for us, and that even with prime rate drifting up and drifting down over the years variable rate mortgages have performed best … an informed consumer is usually not the best thing for a mortgage lenders profitability.

Since variable was widely introduced about 10 years ago the rates have varied significantly. At times, the rate was a low as Prime less 0.9%, and after the 2008 crisis it went as high as prime plus 1%. Until this week it was hovering around prime less 0.8% or 2.2%, which now appears to be changing everywhere to about prime less 0.5% or 2.5%.

So how will this increase the lenders profits, and change consumer behaviour?

Now that the lenders can charge more interest, they will make more money on every variable mortgage, while driving some borrowers to choose fixed terms now that the interest rate spread is only about 1.5%. Now that the immediate benefits of choosing variable over fixed have been diluted, many new borrowers may take a traditional five-fixed term and likely return to variable in the future. Keep in mind that the Bank of Canada will likely start raising rates gradually as our economy improves next year. Currently growth is weak and the Cdn $ is too high so significant inflation is not an immediate concern despite what you are seeing at the gas pumps.

Everyone’s tolerances vary, where some are more suited for a variable mortgage others may prefer fixed …we are here to help the borrower decide what is most appropriate for them?  Remember that the best interest rate alone does not make for a sound “Mortgage Plan”. The objective for all borrowers is to pay less interest for their home, and to do this there is many things to consider like; How is the mortgage interest compounded? Can the interest be tax-deductible? What are the pre-payment privileges? What are the administration fees? Are there any discharge penalties? Is the mortgage portable? Etc. A good rate may save a couple of hundred dollars per year, where a good “Mortgage Plan” should save thousands of dollars per year. You must be curious that if the interest rate was the same at all 52 lenders there must be some differences in the mortgages terms and policies because they cannot possibly all be the same.

Reach out to us when you need to understand the “true” cost of any mortgage, and we’ll reach out to you with more money saving tips.