New mortgage rules may sway a larger number of Canadians to choose variable rates, according to one broker. But should they?
“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,” MBN reader “Welbanks” wrote in the MortgageBrokerNews.ca forum.
“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.”
The comment was in response to a Huffington Post editorial that argued variable rates are unreliable – this, despite their growing popularity.
“With house prices soaring in some Canadian markets, homebuyers are desperate to get as large a loan as they can,” HuffPo business editor Daniel Tencer wrote in a recent column. “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.”
Fixed mortgage rates have been on the rise following October third’s mortgage rule changes along with steady increases on the government bond yield.
Variable rates, meanwhile, have remained fairly low. And with the government expressing no interest in hiking the BoC’s overnight rate target, they may remain so for the foreseeable future.
Tencer doesn’t buy that argument, though.
“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 said. “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.”
Still, variable rates have their proponents.
“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,” broker Mike Maguire wrote on MBN. “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,” Maguire continued. “History over the last 30 years has shown 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.”