A person walks past multiple for-sale and sold real estate signs in Mississauga, Ont., on May 24. People renewing their mortgages or looking to buy a home are faced with a very different decision than they might have been just a few years ago, experts said.Nathan Denette/The Canadian Press
It would be an aggressive bet, but mortgage specialist David Larock says signing on to a five-year variable rate mortgage would still likely save you money compared with a five-year fixed rate.
That’s despite the fact that variable mortgages now start with an interest rate higher than a five-year fixed rate, unlike during the pandemic when lower variable rates were a better deal. It’s also despite the fact that variable rate mortgages have been vilified over the past year as soaring interest rates and rising payments have pushed some homeowners to the brink.
On one hand, the Toronto-based Mr. Larock says the upside to variable rates is still real. But on the other, he says consumers face risk when they take on the product.
A recent report by rates comparison website Ratesdotca showed a person who took out a variable rate mortgage in July, 2021, would have paid an extra $23,579 in interest by now when compared with a five-year fixed rate mortgage. The numbers are based on a $500,000 mortgage taken out when rates were at their lowest during the pandemic.
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But if the past year has taught consumers anything, it’s that the choice between a variable and fixed rate is less about savings or losses, and more about risk appetite.
For years, homebuyers have seen the financial benefits of variable rate mortgages as interest rates trended downward after the 2008 recession. Now, as central banks around the world warn that interest rates may stay higher than we’ve seen in previous years, people are finally seeing exactly how much risk they’re taking on when they don’t lock in their mortgage’s interest rate.
Mortgage specialists say barely any clients today inquire about variable rate mortgages. Ratesdotca data showed inquiries about variable rates dropped to 26 per cent of all their mortgage quotes by December, 2022, compared with 57 per cent in July, 2021.
But they say advice from a broker should be the same as it always was: the upside is real as long as you can deal with the risk.
For example, a calculation by another rates comparison website, Ratehub.ca, found that someone who took on a $500,000 variable rate mortgage in October, 2018, would have saved more than $12,000 in interest payments over the life of their mortgage when compared with a five-year fixed term.
The savings might be surprising to the average person, but James Laird, co-CEO of Ratehub.ca, says they’re expected when you factor in the years of savings and rate cuts that clients benefitted from before rate hikes began.
Variable mortgages also come with the added benefit of having more lenient fees if a client break their mortgage, compared with fixed rate mortgages that usually charge bigger penalties.
And while savings are still possible for people who get a variable mortgage today, Mr. Laird says people need to look at their own financial situation when making mortgage term decisions, rather than at the wider economic environment.
“The discussion should be, if you have excess financial flexibility in your household and risk doesn’t bother you, then you might consider the variable rate. But if either of those things isn’t true, you should just take a fixed rate,” said Mr. Laird, who added that homeowners need to be comfortable with the idea they potentially face further rate hikes if they go variable.
“That was true two years ago, it was true 10 years ago, and it’s true today.”
Earlier this month however, a Globe and Mail story reported that a combination of rising rates on short-term fixed mortgages and higher commissions earned on longer-term variable mortgages could tempt brokers to push more clients toward riskier variable mortgages.
While most economists say that interest rates are on the verge of retreating, Mr. Laird said people should disregard that notion and pay more attention to whether they could handle multiple further interest rate hikes.
It’s a sentiment echoed by Mr. Larock, even though he believes that variable rates will save money in the long run.
The question he’d pose to clients is: Are you willing to lose sleep over interest rate hikes?
“Because right now, there are people losing sleep at night about it,” he said.
Mr. Larock’s recommendation for clients who don’t want to commit to a standard five-year fixed mortgage is to look at three-year fixed.
“Most of the borrowers I work with are choosing three-year rates … it’s that safe, middle-of-the-fairway pick,” Mr. Larock said.
“You don’t get the lowest rates which you do today with five-year fixed rates, but you don’t pay a premium like you do on shorter fixed rates like a one or two-year.”
