In mortgages, there’s always some element of risk.
“Yes” A variable-rate mortgage comes with the upfront risk – your interest rate will change as the prime rate changes. Rate changes are usually announced at eight Bank of Canada meetings a year, with a typical change of 0.25%; very seldom have there been two consecutive increases, so there’s unlikely to be more than a 1% increase in a year.
The “surprise risk” comes from the fixed rate’s IRD penalty – around 1% to 8% of your principal balance, depending on the institution.
Many industry experts estimate that six out of 10 Canadians will break their five-year mortgage within three to four years, resulting in that penalty.
Lifestyle is a good indicator of whether clients should take the risk upfront or later. I ask probing questions to understand clients’ circumstances. Red flags for fixed mortgages include the likelihood of the following within five years: children starting JK, G1, G8 or university; milestones like marriage, having kids and divorce; or older parents moving back home.
Let’s take two examples, using today’s five-year bank rates on a $700,000 mortgage. The first is a 1.30% variable rate with a $2,348 monthly payment, a total of $98,616 in principal payments at end of term and a $2,300 penalty to break. The second is a 2.09% fixed rate with a $2,616 monthly payment, a total of $88,563 in principal payment at end of term and a penalty of $6,400 to $56,000 to break.
Assuming rate increases are equally spread out over the next five years, you would need seven increases for the total amount of interest paid on the variable mortgage to exceed the interest paid on a fixed mortgage. From 2010 to 2020, there were a total of eight rate increases and two decreases, so the historical evidence suggests seven increases would be highly unlikely. Based on the amount of debt Canadians have incurred over the past 12 months, interest rates above 4% (which we haven’t seen for nearly 15 years) would also be highly unlikely, going by the latest Bank of Canada announcement.
All that said… Variable Rate Mortgages might be the right option for you – let’s talk today to find out how much YOU can save with EasyApproval.ca