Commentary: Variable-rate mortgages not really a safer choice

Commentary: Variable-rate mortgages not really a safer choice

Commentary: Variable-rate mortgages not really a safer choice

While variable-rate mortgages are seeing increased popularity due to the growing cost of fixed-rate options, a markets observer cautioned that variable products are an unreliable choice in an age of economic flux.

In a February 7 column for The Huffington Post Canada, business editor Daniel Tencer wrote that while variable mortgages are indeed cheaper, their risk lies in that their rates “[move] up and down constantly with market interest rates, changing interest payments.”

“With house prices soaring in some Canadian markets, homebuyers are desperate to get as large a loan as they can. But that is precisely the reason they should stay away from variable-rate mortgages: If you're indebted to the hilt, you can't afford a surprise increase in your debt,” Tencer explained.

The analyst added that getting a variable-rate product would mean paying higher interest at the onset—an increasingly likely scenario considering the current state of interest rates.

“Central banks’ rates have been on a downward trajectory for decades, from around 20 per cent in the early 1980s to just above zero these days,” Tencer stated. “In recent years, many who took variable rate mortgages won on the bet, because interest rates were falling, and their payments fell with them. But that's all over now. Mortgage rates can't move down much at all, but they have plenty of room to move up.”

Together, these factors make the present era “the worst possible time to get a variable-rate mortgage.”

“At a time when Canadian household debt is already at very risky all-time highs, pushing mortgage borrowers to take on a more volatile and unpredictable mortgage can only be described as irrational and irresponsible.”


 

Related stories:
Variable-rate mortgages becoming more important to the market - study
Higher short-term interest rates not expected until 2018, analyst says

4 Comments
  • Aaron Phinney 2017-02-10 9:20:27 AM
    Given that Prime rate held steady from October 2010 to November 2014 at 3% (the longest period of steady Prime rate without a change since the 1950's), I wonder what decade he is referencing when he states that variable rates “[move] up and down constantly with market interest rates, changing interest payments.”
    While I agree that there has to be a risk analysis to determine affordability when undertaking a variable rate, I disagree that it is “the worst possible time to get a variable-rate mortgage.”

    Reads like a fear editorial to me.
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  • Welbanks 2017-02-10 9:55:22 AM
    I'm in full agreement with this article. Now with the stress test to qualify all high ratio mortgages, it puts VRM back on the table as an option for those that wouldn't have normally taken it under the old rules, because they couldn't afford it, or preferred the more sure bet of a fixed rate qualified at a lower contract rate.

    I can appreciate the need for a stress test, but this latest change will only make the issue worse because it's putting a riskier mortgage back in the hands of those looking for low payments, and not necessarily looking at the long term potential for rate increases squeezing their budgets.

    I swear that the people that make these decisions really have no clue sometimes and can't see the bigger picture because they aren't usually mortgage professionals. It sounds good on paper, but when you think it through, it makes matters worse.

    I hope this policy blows up in the face of the Liberals, along with all this other nonsense related to portfolio insurance. Never seen policies so out of step with reality as we've seen under Trudeau. Ugh.
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  • Mike Maguire 2017-02-10 10:06:51 AM
    Everyone talks about the risks of variable rates but nobody discusses the risks of fixed rates. Fixed rates can cause huge penalties at times that would have been avoided by variable rates. Then there is the math of it. The lower your rate at the beginning of your mortgage the faster you pay it down. Plus the opportunity cost. The extra you are paying on a fixed rate could be going to something more useful. Paying debt down, saving or paying the mortgage down faster. History over the last 30 years has showing that short term and variable rates have a huge advantage over fixed. I have been a big fan of variable rates ever since i locked in at 11.5% in the 80's and then rates tumbled to single digit.
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