Brokers debate fixed vs. variable

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While some brokers prefer one over the other, it's often best to evaluate on a client-by-client basis, says one player.

"This is not universal truth that variable rate mortgage is better than fixed rate mortgage," Kuldip Panesar of Homeland Mortgage Corp. wrote on MortgageBrokerNews.ca. "Which product is suitable for the clients that depends on each and every economic situation of the client."

The message from several brokers is that variable rates still reign supreme, however, following a story about one financial professional’s personal mortgage blunder.

“From what I analyze daily, low rates will be with us for a long time,” Brian Lambert of Real Mortgage Associates wrote on MortgageBrokerNews.ca. “Even if they rise, it would be only marginally as governments would have to allow time to see what effects that would cause any economy.”

The comment was in response to a story about a financial planner who switched his mortgage from a variable to a fixed rate.

Ted Rechtshaffen -- president of TriDelta Financial -- speaking to the Financial Post, admitted that in 2009 he switched his variable rate mortgage to a fixed, after heeding warnings that variable rates would be on the rise. And that the move was a mistake.

“I was wrong. I had a variable rate mortgage and in 2009 I pulled the plug and went fixed,” Rechtshaffen, financial planner and president of TriDelta Financial told the Post. “I did mess up, but my question was what benefit do I get locking-in versus going variable?”

It seems brokers will be advising their clients to avoid the same mistake – despite any posturing from the big banks.

“As mortgage professionals we listen to a lot of noise coming from the media and big banks. You really need to read between the lines,” Lambert wrote. “Big banks agenda is to scare clients into locking in to a fixed rate, this secures their profit over a fixed term. The media just churns the message as it makes for news.”

Related:
Financial professional admits he was wrong about mortgage choice
  • Angela Wong-Liao - Invis on 2014-10-30 12:26:04 PM

    "Variable rate or fixed rate" I am always asked by clients. I believe the decision is based on each client's individual needs and situations, we cannot use the ONE SIZE FITS ALL approach. For example, a young couple with two young kids who are first time home buyers with fixed income and 5% down payment, it can be risky if they chose variable rate mortgage as they have limited equity and no flexibility in income. This young couple simply cannot afford any variance in interest rate plus they can qualify substantially less in mortgage amount should they chose variable rate because of the qualifying rate that use for variable rate mortgage product.
    On the contrary, if a couple with good job stability, flexible income and conventional mortgage, variable rate mortgage product is best suitable to them as they can afford the interest rate variances and possibly some interest savings in comparing to fixed rate mortgage product.

  • Jivan Sanghera on 2014-10-30 12:56:12 PM

    If a client qualifies for a Variable rate, I educate them to the benefits and potential downfalls of the product. But more than 9 out of 10 of my clients are in a variable rate mortgage. With a spread of approx. 70 points today I can't see the logic for presenting a case that the fixed at 2.99 will out perform the variable. There is no upwards pressure on prime that I can see. And no pressure presenting itself in the short term. As such especially with the convertibility options, it seems like the right product to me.

  • abe on 2014-10-30 2:57:39 PM

    If a client qualifies for a high ratio mtg @ the BOC rate, they have all the other mtg options as well, i.e. short terms and low rates.
    If you watch your rate sheets some lenders have some low rates on the 2 and 3 year terms.
    You’re right, a young family with 5% down payment on a fixed income and 2 kids, it would be tough on them if rates went up. However, they qualified for the variable rate and can afford the higher payment.
    If you want stability in payments take a short term, but make the payments based on the 5 year term rate (which they said they can make anyway) and at the end of term they have opportunity to see which way the rates are going at that time. and lock in short term again or take a longer term, or sell the property NO penalty.
    (This program was outlined to me by a TD bank manager in 2002, she said she never went longer then 1 or 2 years as the rates were, at least, in her case, .75% lower then the 5 year term)
    Why do we not set a plan like this up, because we get paid more for 5 year terms.
    Good for the client, bad for the broker/banker

  • Ottawa Broker on 2014-10-30 4:04:40 PM

    @ Abe:

    That may work now as rates are at an all time low. Taking a short term rate is what you do when rates are high. When rates are at an all time low, it is wiser to take a longer term. At some point, our rates will turn and move upwards. So what will you tell the client when they could have gotten a 5 year rate under 4% and instead they took a 2 year rate and now at renewal they can't get a rate any lower than 4.50%????
    I find your method to be short sited on proper financial planning in regards to a clients mortgage. of course the banks want their clients to be renewing into higher rates as it is beneficial to the bank. In my opinion, the short term rates are not the way to go, especially if someone is on a fixed income.

  • Kuldip S Panesar Homeland Mortgage Corp. on 2014-10-30 8:27:05 PM

    This is not universal truth that variable rate mortgage is better than fixed rate mortgage. Which product is suitable for the clients that depends on each and every economic situation of the client. If a client is having high ratio mortgage tight in income to qualify then the fixed rate is better than variable. In other case if the client want to sell the house before the expiry of fixed term of mortgage then variable rate is suitable. In this case penalty will be lower than the fixed term . Every time we are to consider the client's situation suitability

  • abe on 2014-10-30 10:12:39 PM

    If the mortgage rates are going to increase to over 4% or higher in less than 24 months why are we having this discussion? Variable rate versus Fixed Rates, sign every client to a 5 year or longer fixed term.
    5 Year terms are good for higher commissions for brokers and bigger bonuses for bankers.

  • abe on 2014-10-30 10:15:19 PM

    Can I point out that when a client qualifies for a Variable Rate mtg they have qualified on the BOC rate, today 4.79%.
    If a client can make that payment then a higher payment on a lower rate should not be an issue

  • kevin irvine on 2014-10-31 2:07:50 PM

    it's interesting and also amazing how some people feel about this. I found it rarely works that you can take a two year term and sell when the term is up and avoid a penalty, unless it's a hot market. I feel you are just kind of stuck for the full two years hoping rates don't go up. You have to qualify at the higher rate anyways so I would rather recommend a vrm to get the lower rate and the flexibility to lock in at any time if rates start jumping if need be. I just don't agree with how the bank convinces people a 2 year term is the way to go but that is typical of the banks....of course this is all in today's market and it changes with the market...as a professional we should understand what is happening and adjust accordingly. I find brokers who sell on rate alone are doing a disservice to us all with this very poor sales pitch that happens far too often for my liking and generally is not the best for a long term career.

  • as is on 2014-11-02 4:15:36 PM

    ade: yeas, the client qualifies for variable rate at 4.79% NOW, based on current income.

    Will the client's income increase in time? Will employment in his/her industry be stable, and will his/her employment be stable? Any looming health problems? These issues need to be addressed., too

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