November 26, 2013

Mortgage Shoppers Eyeing Variable Rates

By RateHub.ca

This month, we’ve been focusing a lot of our content around alternative mortgages: second mortgages, self-employed mortgages, bad credit mortgages, etc. But there’s a lot happening with mortgage rates that we haven’t dived into. Perhaps the biggest thing worth mentioning is the current spread (difference) between fixed and variable rates.

For the first time in two years, the difference between discounted fixed and discounted variable rates on our site is up to a full percentage point. Just six months ago, 5-year fixed rates were as low as 2.64%; today, they’re up to 3.39% – a 0.75% increase. Variable rates, on the other hand, have gone down. January saw 5-year variable rates at 2.55%; today, they’re sitting at just 2.40%.

Variable rates’ downward trend has been spotted by mortgage shoppers across the country. “Our Vancouver office has noticed more people asking questions about variable rates, and more than 50% of our clients are now choosing them over the fixed,” said Chris Rempel, a mortgage broker with True North Mortgage. We’ve seen a similar trend on our site, for obvious reasons.

By choosing to go with a 5-year variable rate of 2.40% today, you could be saving 0.99% off the best 5-year fixed rate (3.39%) on our site. On a $391,820 home purchase (the current national average home price according to the Canadian Real Estate Association) with 20% down, that’s a difference of $158/month or $1,896/year – not exactly chump change in a new homeowner’s budget.

Aside from the obvious savings, however, there is of course the risk that your variable interest rate could rise. Historically, we can see in the chart above that discounted variable rates have been lower than discounted fixed rates for the past five years. But the risk tolerance a buyer has will come into play, when making the decision to go fixed vs. variable.

Before you decide, take the time to run a few scenarios. Using the example we just mentioned, let’s assume you went variable and that your rate has remained relatively unchanged for two years. What if your rate jumped up a percentage point after two years? You’d have to start paying that extra $158/month, after all. But had you gone fixed, you would’ve been paying that amount all along.

Again, if your risk tolerance is low or cash is tight, and you’d prefer to rely on a set mortgage payment coming out of your budget each month, a fixed mortgage rate may be a better option. But don’t forget to ask yourself: Would you be more upset paying more each month in a fixed rate mortgage, or if your variable rate increased and you paid more monthly down the line?