March 29, 2016 Best Mortgage Rates Update

Fixed or Variable Rates in Today's Economic Climate and Mortgage Market

Historically, variable rate mortgages (VRM’s) have a compelling history of saving their clients a lot of money over the years. There was a much-publicized study done by Dr. Moshe Milevsky, a Finance professor at York University, called Floating Your Way to Prosperity, which showed that the five-year variable rate saved Canadians money about 90% of the time between 1950 and 2007. The average variable-rate saving over fifteen years was a little more than $20,000 for every $100,000 borrowed, so we’re not talking about small potatoes here.

Most savvy borrowers and real estate investors are quite happy to simply default to a VRM, however in today’s economic climate and mortgage market, does it make the same sense to do so?

VRM’s are priced off of lender prime rates, and typically move when the Bank of Canada raises or lowers it’s overnight lending rate. With Canada’s economy still teetering from a rout in oil prices over the last 2 years, it seems that the Bank of Canada will not rush to raise the overnight lending rate anytime soon. That being said, it’s also true that the BoC will probably not lower its overnight lending rate either. With it’s current policy rate sitting at 0.5% it would take emergency measures to push the bank to lower to 0.00%. Compound this with the possibility of lenders not passing along these further discounts – the potential for additional savings with a VRM starts to look a little bleak.

Add to this, over the last two months, we’ve seen the price of oil stabilize, and even begin to edge higher. The Loonie has also recovered slightly and there seems to a general sentiment that there is light at the end of the tunnel for Canada’s economy. Now the Trudeau government also seems intent on providing some serious government stimulus over the next five years, and you start to paint a picture of a potentially strong economic recovery.

Today you can secure a 5-year fixed rate for around 2.5%, with some specials as low as 2.39% currently. Variable rates are being offered in the ballpark of 2.3%. The spread between fixed and variable rates is super thin (.10-.20%), and considering potential upside in the Canadian economy over the next 5 years, it looks like VRM’s carry more potential risk and less reward than ever.

While it’s true that variable rate penalties can often be lower than their fixed-rate penalty equivalents, at most lenders the IRD penalty only kicks in if your contract rate is materially higher than your lender’s rate that most closely matches the term remaining on your mortgage at your time of discharge. As such, fixed rates would have to fall further from today’s rock bottom levels for you to pay a penalty of more than three months’ interest if you decide to break your mortgage early, unless you opt for a fixed rate with a Big Six Bank, in which case you still get hosed.

So although the fixed-versus-variable trade off looks like a no brainer in favour of the variable-rate option on first pass, upon closer examination I think the balance of probabilities today actually favours the five-year fixed rate for most borrowers. This conclusion isn’t based on a view of where rates may be headed in future, but is instead an assessment of the risks and rewards associated with both options.

While you’ll pay a little more for a five-year fixed rate today, this ‘rate-insurance premium’ only costs you about 0.20% and that spread looks dirt cheap when using any historical comparison.

New Calculator!

This week I released my newest calculator. This Property Transfer Tax Calculator determines the property transfer taxes due on purchases in BC (under the new rules established in March 2016). It will also calculate the first time homebuyers, and newly built home tax exemptions. 

If you're a first time homebuyer, or considering purchasing a 'newly built home' - use this calculator to plan for your closing costs!

Important Dates:

New downpayment rules are now in effect after February 15, 2016.

Use my new Closing Cost Calculator for First Time Homebuyers to figure out what your minimum downpayment would be under the new rules. (You don't have to be a first time homebuyer to use the calculator)

Rates:

Fixed mortgage rates dropped slightly among more lenders this week - with the net result being more lenders offering the same lower rates. The lowest fixed rate offered right now is 2.39%. Several mono-line lenders are competing with decent products in the 2.44% - 2.54% range. 

Variable rates are still sitting rather stagnant. Discounts off prime are pretty weak, and with the super low fixed rates, the spread between fixed and variable rate mortgages is super thin. Considering a brighter outlook for Canada's economy, it makes real sense to lock into a fixed-rate product right now, rather than perhaps endure potential rate hikes over the next 3-4 years. Some full featured quick close variable rates are closing in on P-0.3% (2.4%) and some low basic rate products are digging into P-.45 (2.25%) territory again.

Big Banks continue to lag behind the mono-line lenders. They simply are not in the game right now. If you have a renewal notice from your big bank, come see me right away. I guarantee I will beat their rate and save you some money.

Best credit union option for a 5-year fixed is currently is Coast Capital at 2.69% for high ratio deals, and 2.74% for conventional deals. Coast Capital is also offering a $1000 to be used in a registered investment product of your choice, and $500 towards legal and appraisal fees to first time homebuyers.

5 Year Fixed Rates5 Year Variable RatesHELOC
Quick Close Specials2.39% - Must Close within 45 Days - High Ratio Only P-0.4% (2.3%) 45 Day CloseP +0.5%
Best Standard Rates2.54% - High Ratio - 90 Day Close 2.59% -Conventional - 120 Day CloseP-0.35% (2.35%)P +0.5%
Low Rate Basic Products2.39% -Must Close in 90 Days - High Ratio Only 2.54% - Must Close in 90 Days - ConventionalP-0.5% (2.2%) - Must Close in 90 Days - High Ratio Only P-0.45% (2.25%) - Must Close in 90 Days - Conventionaln/a
Credit Unions2.74% - Conventional 2.69% - High RatioP-0.25% (2.45%)P +0.5%
Pre-Approvals2.79%--

* Low Rate Basic Products have great rates, but have restrictions that include high discharge penalties, inability to blend mortgage rates if you sell & buy, inability to leave lender during term, etc.

Other Rates:

Lender Prime2.7%
Bank of Canada Key Overnight Lending Rate0.5%
Next Bank of Canada Rate Update April 13, 2016
Benchmark Rate4.64%
5 Year Government of Canada Bond Yield (March 28, 2016)0.73%

Mike Grace is an independent full-time mortgage planner and industry insider located in Victoria, BC. If you are purchasing, refinancing or renewing your mortgage, contact Mike to obtain the best available rates and terms.