Brokers looking for definitive advice on steering clients toward fixed, variable or combination mortgages are out of luck, with industry opinion divided ahead of expected rate hikes.
“If you want to follow sheep into a fixed-rate product, you’re going to get slaughtered,” Vince Gaetano, vice president and principal broker for MonsterMortgage.ca, told MortgageBrokerNews.ca. “The gap today between variable and fixed rates is too significant. Variable is where we should be directing clients.”
As Canadians brace for a possible hike in the Central Bank’s key interest rate, mortgage industry opinion is splintering on how quickly Governor Mark Carney will move to close that gap. A recent RBC report suggests the bank’s overnight rate may rise 2.5 percentage points by the close of 2012.
Gaetano and others bullish on ARMS argue new and renewing borrowers will have time to make significant dents in their principals before the prime rate claws its way back from historic lows.
Other industry veterans take a different view, although acknowledge continuing popularity of the adjustable rate.
“If you look at the current rates on fixed rate mortgages,” said Boris Bozic, president and CEO of mortgage lender Merix Financial, “you really can’t go wrong in opting for fixed – any rate under four per cent is free money. There is a value to peace of mind.”
Most economists are predicting the Central Bank will nudge rates higher this year as both Canada and the U.S. rack up modest employment gains and rising fuel prices stir inflation fears.
Uncertainty about the timing of that friendly nudge – or whether it will be more of a shove – means brokers should continue to represent fixed rate mortgages as a hedge against future volatility, said Bozic. He’s also impressed by the growing number of hybrid products, splitting a mortgage between fixed and variable rates.
Gaetano is more critical of combination mortgages, now being floated by some of the big banks: “I’m not a fan of them because the probability of a client locking in the variable portion at some future date means that renewal dates for each half of the mortgage will never match up.”
Gaetano also sees fixed mortgages as suited to B clients skirting acceptable debt-service ratios and with minimum down payment or equity. Here at least, almost all mortgage professionals agree: Brokers should steer that type of client toward a long-term fixed product to remove the risk of a punishing rate adjustment.
“In my opinion it’s the only responsible thing for a broker to do,” said David Larock, president of Integrated Mortgage Planners. “Otherwise the client would be in danger of losing their home.” His advice to other originators comes as the Canadian Real Estate Association reports an uptick in housing activity ahead of federal rule changes meant to rein in on household borrowing.
Starting March 18, Ottawa will, among other key changes, withdraw government backing for 35-year mortgages, lowering the cap to 30.
The plan has rattled many real estate agents, concerned the move will push some first-time buyers out and lower Canadian home prices by as much as 10 percent.
Those ifs and buts may make it tougher to guide clients through an already-confusing spring buying season and into a variable, fixed or 50-50 mortgage. But ultimately, Larock told MortgageBrokerNews.ca, the client’s risk aversion should dictate that decision – not the broker’s.
“Not even the smartest among us knows for sure where rates are going,” he said. “The question brokers need to ask their clients is ‘Are you more likely to lose sleep at night worrying that you’re paying too much interest or lose sleep worrying that rates will go up?