Fixed or Variable?

Rarely has the question been more relevant than this year, when 5-year fixed rates are dropping like flies, and the Bank of Canada is on pace to hike up the Prime rate. My general rule of thumb is that when fixed and variable are spread by more than 1%, take variable. IN today’s instance, the best discount available on a variable is -0.75, which gives us 2%, vs the best fixed at the 3.7%ish range. However, moving long-term, it wouldn’t be unwise to consider a 5 year fixed when the rate is below 4%, like it is today. It is said that more than 77% of the time, it’s better to take variable, and this wonderful chart.

click to see larger image

Yet, there are many other factors to take into account such as: Income / Risk Factor / Savings and Equity. Is it a client’s first-time purchase? A rental? Is the client on a fixed-income or do they anticipate a great upswing in the long-term? Dependents? Aging parents? Debt load? So many questions mean that each client will get a different answer.

One solution I am not a big proponent of is the 50/50 mixed mortgage. In my experience I prefer a client to go one way or another, because if they are indeed anxious about rising rates, why expose half their borrowing to a variable rate AND one that isn’t at the deepest discount? Nor for the fixed? A typical 50/50 rate is priced about .10-.20 points higher than the best on either side.


Rates, again.

This week a slew of big 5 Banks came out with rate predictions, in anticipation of a July rate hike by Bank of Canada.

Here is a rundown of each bank’s point of view:

1.  Bank of Montreal predicts that a 25 point hike is necessary but a double-dip recession isn’t out of the question.

2.  CIBC’s research calls for rate hikes in the next 2-3 quarters, then a steady approach.

3.  Royal Bank of Canada feels we will see “gradual increases”.

4.  Scotia Bank see 75 poin increase by year end 2010.

and finally, 5. TD Bank also see a steady rate increase environment.

All banks note that the GDP is flat since April, our economy is slowing down somewhat, and we should approach the second half of the year cautiously. From my perspective, while shopping in the middle of the week at Yorkdale, cars and people packed the stores. Perhaps that is not as good an indicator on such a micro scale, but it was nice to see people spending money.

Fixed Rates

If you prefer to examine the fixed rate market, lenders are finally dropping their rates midsummer. One rate I saw was at 3.99% 5 year closed, surely a good option for investors or people who can’t sleep at night worrying about a rising Prime market. Expect the rates to stay low as we progress into the hot and humid days.


The Recession.

The other day we were discussing mortgages and the impact of the soon-to-be-over recession. Housing prices fell for a very brief period of time (and it was a fantastic time to buy). Since then we are up above the pre-recession peak.

All is not well, however. When the New York Times makes mention of a potential housing bubble in a March article, we’re getting the negative attention we have thus far, avoided. It can only get worse from her when almost 80% of pre-tax income is used to support a 2 bedroom bungalow in the Vancouver area.

Someone in the industry said to me “the recession was short-lived, but the real impact will be felt for a long time in house prices”. We think we’re out of the woods, but with the rapidly increasing fixed rising rates, the sudden change in mortgage rule qualification, and the jump in prime rate, the taps have tightened and the flow of money will be restricted. If we felt that the recession had any impact on house prices and the market, these new rule changes will really show us what an impact will feel like – and it won’t be pretty.

So what can you do? If you’re in variable, and haven’t been doing so, pay down your mortgage as fast as possible by increasing your mortgage payment. If in fixed – ride it out because that 5% rate that looked pretty horrible earlier this year is suddenly “the norm” again. Most important, examine your renewal options by calling us anytime to discuss. Over 80% of clients renew with their current lender – potentially a very costly decision without shopping around.


What will happen to rates?

I stopped trying to predict rates recently and have accepted that the most important thing is to learn from the past, and from other economies. As such, when people ask me where are rates headed, I can only give a general guideline of what I see and hear – they are headed Upwards. By how much? When? What should I do? These questions are too personal to answer in a blog entry, but what I can say is that generally speaking a rising rate market will be healthy for Canadians. Too many buyers have over-leveredged themselves with mortgage debt, consumer debt, and have gotten too used to record-low rates.

One other important factor that I rarely, if ever hear being discussed is quality of life. When it comes to rising rates and making a decision whether buying a home is a good idea or not – too few people comment on the home for what it is: a base of family, of growth, and of bonding. It is a place we can relax in, a place we teach our children to read in, a place we host family dinners in. Rates – be they up or down – should not interfere with the bigger picture at hand. While they are crucial in planning a mortgage strategy – they are not and should not be the only deciding factor of when or if to buy, and too frequently I hear people making decisions based on rates and prices first, then the home itself. Just recently I heard someone say to me “I’ve been through so many bidding wars, I’m just going to get the next place no matter what”. It’s chilling to hear that.

My generation is used to the idea that real estate will always rise. Unfortunately it may not…

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