Variable rates still a dice roll, despite rate hold?

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Some brokers still aren’t completely sold on the idea of  variable ratesdespite the hike in fixed rates and the recent Bank of Canada announcement suggesting ARMs could remain at historic lows till 2015.

“I’m still not in the camp for the variable rate yet because the fixed rates are on the rise (and) if you take a variable rate right now you are going for that low, low rate,” Carolyn Dunlop of Dominion Lending Centres Edge Financial told MortgageBrokerNews.ca. “Once the Bank of Canada starts to raise those rates, you’re likely to be locked into higher rates.”

Despite indications that the overnight rate will be left untouched until 2015, Dunlop isn’t convinced the money a client saves in the short term with a variable rate will necessarily make up for a potential spikes in fixed and variable rates in the near future.

“The major question is what will save you now and what will save you later?” she said.

Still, most brokers are convinced the rate will, in fact, remain untouched for some months to come.

“I think that some of the changes they have made to lending rules have affected the market and I think they are trying to stay the course and not disrupt the market further,” Kevin Crigger of Mortgage Alliance told MBN. “There is nothing to indicate a change to the overnight rate; the economy is moving along decently, the real estate market is still very strong and I don’t think they want to rock the boat.”

For his part, Crigger isn’t yet sold on variable rates, either.

“I think it really depends on the person’s individual situation and tolerance for risk,” Crigger said. “Mortgage rates have been at unprecedented rates for a long time. Long-term rates represent security and, depending on their tolerance for risk, it’s still a good idea to go for fixed rates.”

The only absolute is that those currently in a variable rate will celebrate the Bank of Canada’s recent announcement.

“I think it’s great for those who are locked into the existing variable rates,” Dunlop said.

  • Ron Butler on 2013-09-05 10:25:43 AM

    So with the bond yields headed straight up this week; if we hit a 5 - year fixed of 3.69% next week and 5 - year Variable is Prime less 0.60% or 2.40% then there is a 129 basis point spread by next week.

    The majority of economists predict no Prime Rate increase till late 2014 early 2015. When Prime rate does go up, it normally increases 25 basis points and at no faster a pace than once every 6 weeks. So once it started going up, the Variable Rate would need 5 increases (30 weeks) to get to 3.65%. What if Prime only went up 1.00% in all of 2015, the client would be sitting at 3.40% till 2016.

    None of us really know what will actually happen. We don't even know that fixed rates might come back down again. We know none of these things in absolute terms. So if I am honest and say I cannot see into the future perfectly then my fall back is: take a rate that is 129 basis points less and pay your mortgage off faster for now and let us carefully monitor the changes in Prime.

    Bottom line is nobody really knows so I default to lowest available rate.

  • Cameron Mackie on 2013-09-05 7:56:02 PM

    I can't agree more Ron.

    I've been selling variable with confidence lately. Over 73% of my clients are now jumping aboard the variable ship, I always prepare them for possible rate "storm" however the spread is to large to ignore.

    I find we all fall victim to the media scare, but numbers don't lie. Research still shows variable outperforms fixed by 88%.

  • Jake on 2013-09-06 4:42:36 AM

    Prime-60 isn't available without a buydown so although I agree with you in selling variable, I don't agree that that's the baseline rate to compare it to.

    If you take 2.5% (or whatever you choose to buy it down to) and pay as if you're paying 3.5% or 4% even, you've saved a tonne and insulated yourself before rates jump by 1.5% (upwards of), so you have a lot of wiggle room before rates go up or WHEN they do.

  • Ron Butler on 2013-09-06 6:16:04 AM

    Well Jake, Prime less 0.60% is my base rate. We offer it 15 times a day.

  • Jake on 2013-09-06 6:21:48 AM

    Yeah I know YOU offer it, and so can I, with a buydown. The fact is your math is wrong because -60 isn't the "base" rate.

    Although it is wrong in a small sense because I still agree with your overall sentiment. -45 as the base rate still makes sense to go variable.

  • G on 2013-09-16 3:32:38 PM

    I currently have a rate hold of 2.89% fixed for 5-years (expires at the end of the month), but have also been offered a variable closed for 5 years of 2.5% I'm struggling with the fact that the spread is only 39 basis points. Does it make more sense to go closed or variable when the spread is not as wide as your example above?

    Any advice would be helpful
    Thanks.
    G

  • Ron Butler on 2013-09-17 6:25:37 AM

    @G Keep the 2.89% fixed , please note that I stressed the "spread" in the rates needed to be high in order to make variable a great alternative to fixed but while right now it is 129 basis points if you were starting fresh today 39 basis points spread should mean you stay with the 2.89% 5 - yr rate.

  • G on 2013-09-17 8:36:04 AM

    @Ron Thank you!

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