With house prices surging month by month across the country, low mortgage rates are more important than ever in making a home purchase affordable.
So it’s understandable that variable-rate mortgages are making a comeback these days. One big mortgage broker had five-year fixed rate mortgages at 2.04 per cent early this week, and five-year variable rate mortgages at 1.35 per cent. A couple buying a home recently got in touch for help choosing between these two options: “Variable or fixed rate mortgage renewal? Which should we choose in April 2021?”
I say fixed rate, but not because I think it’s sure to cost this couple less in interest. A fixed rate mortgage may well prove less costly, but there’s no way to be sure about that. What the fixed rate mortgage will deliver without fail: Shelter from any upsets to come as the economy is weaned off the low interest rates used by the Bank of Canada to sustain growth in the pandemic.
One of the things keeping economists busy these days is trying to decide how much inflation we’re going to see in the next couple of years. A lot of government stimulus has been pumped into the economy and more is coming. One possible outcome is a pickup in the inflation rate that pushes interest rates to pre-pandemic levels or higher.
With a variable-rate mortgage, you’re forced to keep a constant eye on the financial news. Once the Bank of Canada starts cranking rates higher, each increase will flow down to your bank’s prime lending rate and, in turn, to the rate on your variable-rate mortgage. Just three rate increases of 0.25 of percentage point and you’re above the current 2.04 per cent rate for a five-year fixed rate mortgage. If you go variable, expect to spend a lot of time in the coming years thinking about whether to lock in to a fixed-rate mortgage.
Or, take a fixed rate mortgage and enjoy an extremely low rate by historical standards for five full years. By then, the pandemic drama should be long over. Please let that be true.
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Rob’s personal finance reading list
The best retirement advice: Save more
A point that can’t be stressed enough – the big difference-maker in saving for retirement is how much you put away.
The bank chopped his credit line
The lesson of this story by Pat Foran, longtime consumer alert reporter for CTV, is that your bank can lower the limit on your line of credit without notice. Probably worth a check on your bank’s website to see if your credit limit is what you think it is.
Store cards vs. credit cards
A rundown on the pros and cons of using a Visa, Mastercard or American Express card versus a credit card issued by a retail store.
Sloppy edges, blotchy walls
The cheapest home reno ever is to paint. To get full value, avoid these 10 amateur mistakes people make when painting.
Ask Rob
Q: I am comparing between two exchange-traded funds and found that the only difference between the two is that one has a high portfolio turnover rate (82 per cent) while the other one has a low rate (12 per cent) Is a high turnover rate the sign of a poorly managed index fund?
A: Let’s assume both funds track the same or similar indexes. Look up the latest management report of fund performance for both funds and track the trading expense ratio for both funds over the past several years (ETF company fund profiles contain links to these reports). The TER tracks trading costs as a percentage of assets. Add it to the management expense ratio, or MER, for a full picture of how much a fund costs to own. A well-run ETF tracking a major stock index should have a TER at or close to zero on a consistent basis.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
The Habistat is a website you have to check out if you’re looking for data explaining what’s happening with housing. Here’s a link to a tool that lets you compare the rise of house prices and incomes. Guess which is rising faster.
The money-free zone
The Warren Zevon song Porcelain Monkey, about a sad Elvis-like character, has one of my favourite rock music rhymes: “Hip-shakin’ shoutin’ in gold lame/That’s how he earned his regal sobriquet.” How can you top that?
What I’ve been writing about
- How young adults and the whole country win with a tougher mortgage stress test for home buyers
- The 2021 ETF Buyer’s Guide: Best Canadian dividend funds
- ‘Where does one find a 4% conservative rate of return?’
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: How to survive the gig economy • How to get out of debt • Is now the right time to buy a house? • Crisis-proof your finances • Does investing change during a pandemic? • Can you afford to live downtown? • The cost of kids • Should you move back in with your parents?
- ✔️ A 10-point pandemic personal finance checklist: Create a "wartime" family budget; stop worrying about bank deposits; clean out your big-bank savings account; get relief on car payments; get preapproved for a mortgage; WFH? Save $1,000 a month; save, save, save; build resilience by not anxiety-buying; consider the cost of mortgage deferrals; get ready for the second wave of financial distress.
- 📈 Investing: The case for a tight portfolio of big blue chips dividend stocks; robo-advisers beat human advisors (and they’re thriving), why online banks that are better than the branch; is it time to invest your 2020 TFSA; don’t get your mortgage at a bank; why it’s so hard to invest in preferred shares; stock up on stocks to retire early; and are you following the 10-year rule with your investments?
- 💰 Saving: Food waste is wasted money; why you might regret that SUV and find out if CAA is worth it; juice your PC Optimum points; how an ex-Bay Street lawyer got out of debt; blindly easy tweak to your retirement investments to survive economic downturn; should you buy that latte?
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob Carrick