Variable rates get their sexy back

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Reports of the demise of variable rates appear to have been greatly exaggerated.

“For over a year now many consumers have been fixated in five-year fixed mortgages,” said Hicham Sean Chouman, broker and president of Landmark Financial Group in Montreal. “But once variable rates move into the prime minus .55 bps region they will be a safe bet and become attractive again.”

A quick check of online rate sites indicates that the lowest 5-year fixed is now around 2.94 per cent. The lowest 5-year variable is 2.65 per cent – just 20 bps off of Chouman’s threshold.

Still today’s rates are increasingly good enough for other brokers and their clients as they read the tea leaves suggesting the Bank of Canada will hold off on a rate hike longer than most economists had predicted. Any rise will also be more protracted than those earlier expectations.

In fact, a significant number of economists themselves recently re-adjusted their forecasts for a hike in the overnight rate, suggesting it could as late as 2015, given the world economy. Such a scenario would allow borrowers ample cushion to realize saving on a variable mortgage even if rates inch upwards further down the road, offer some brokers now seeing signs that variable rates are more and more attractive to borrowers – and not just the risk-seekers.

Last year’s series of rate drops shifted consumers’ historical preference for variable to fixed mortgages.

Brokers who previously had their client list equally split between variable and fixed mortgages reported as much as 80 per cent of their customers looking for fixed rates.

However, if rates continue to hold or slide, we could see the pendulum swing back.

“At the moment many consumers may not want to risk it when 5-year fixed mortgages are quite low,” explained Chouman. “But most likely in February we will see variable rates inch lower to a more desirable rate. Then variables will become a good bargain.”

  • Christopher Molder on 2012-10-03 3:43:10 AM

    I'd love to see VRMs be priced back in the market again. It's hard to justify a variable right now given there isn't much of an advantage to taking a variable over fixed. But I think if we start approaching P-.50 it will be hard for borrowers not to justify a variable.

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