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Variable-rate Advantage All But Gone

—The Mortgage Report: July 28—

fixed or variable mortgage rates
  • A Paper-Thin Spread: The gap between fixed and variable rates is as narrow as it’s been in months. The most competitive mortgage providers now sell 5-year fixed rates for less than 7 basis points above the cheapest variable rates. That “fixed-variable spread” could soon become negative, as it was in early March. Fixed rates are now so low that even a single 1/4-point rate hike from the Bank of Canada—three to four years from now—could result in borrowers paying more interest in a variable than a 5-year fixed. And when the BoC raises rates, it virtually never hikes just once. On top of that, the Bank of Canada implies that prime rate cuts are finito. So, floaters can no longer rely on future interest reductions. Such an analysis does have one caveat, however. It assumes you maintain the mortgage a full five years. That’s relevant because variable rates have much lower prepayment penalties in most cases. Then again, if you know you’ll need a mortgage 5+ years and you pick a “fair penalty” lender, prepayment risk is no reason to shun a 5-year fixed term.
  • Separation Financing: Tens of thousands of homeowners split up with their spouse or partner each year. A lot of them don’t know it, but with as little as 5% equity left in the home, one party can buy out the other and stay living in the property. A quick primer…
  • Tough Times for Micro Lenders: In May, Ontario Mortgage Investment Corporations (MICs) closed only three-quarters of the mortgages they closed the year before, according to data from Teranet. MICs—which have roughly 13 times the default rate of banks—are higher-cost lenders. They’re often used by borrowers in a bind, with no better options. MICs have had a tremendous run since the last recession, amassing market share thanks partly to improved distribution through mortgage brokers and lower interest rates. But now, MIC borrowers are reportedly missing payments at a materially higher rate and some MICs are running into liquidity problems. Investors are getting nervous, despite the fact MIC loans generally have 25-40%+ equity. “…The problem is, the last 10 years the [housing] market has been very good and corrected any mistakes you have made [as a MIC lender],” RiverRock CEO Nick Kyprianou told the Globe & Mail. The implication is that some MICs lent too aggressively and will have to cease lending. And they will. But given their small single-digit percentage of the mortgage market, the news headlines will be worse than the actual problem.
  • “Alternative” Mortgage Rates Fall: Non-prime mortgage rates have been dropping noticeably, as have GIC rates. Short-term GICs, which are used to fund many higher-risk mortgages, are down 120+ basis points since January 1. That and shrinking non-prime mortgage growth are leading to the most competitive alternative lending rates we’ve ever seen. That’s welcome news for borrowers with weaker credit, a harder time proving income and/or recent immigrant status. As just one example, self-employed borrowers who:
    (A) have high debt ratios (e.g., a 50% total debt service ratio versus the 44% normal maximum), and
    (B) cannot prove enough income using traditional methods (like tax returns)
    …can now find rates as low as 3.39%. That’s an exceptionally low premium for higher-risk financing.
  • Brakes Slam on Condo Sales: New condo sales in the GTA plunged 85% last quarter, the most since the 2009 financial crisis. (Source: Urbanation)

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  • If fixed rates are trending down, that seems like more of a reason to go with a 5yr variable and lock in when fixed rates bottom out. As I’ve commented before, most of the major banks will let you lock in at or near their best discretionary rates. TD is my favorite, as you can go to a 3yr fixed from a 5yr variable at any time. Scotia & BMO require the new term to be equal or longer than the term remaining on the variable rate mortgage.

    • The Spy says:

      Ralph, If you can successfully time the bottom in fixed rates (i.e., bond yields) then you are far more prescient than us, and for that matter the overwhelming majority of the population.

      Also, depending on your definition of “near,” the following statement is not true for the average borrower in our experience –> “most of the major banks will let you lock in at or near their best discretionary rates”

      Furthermore, rates vary materially by lender. So borrower ‘A’ may get offered a 2.19% five-year fixed rate on conversions while borrower ‘B’ may get 2.39%. Meanwhile, market-best rates could be 1.79% to 1.99%.

  • Clay says:

    I just signed a 5yr variable back in June for 1.79%. Should I be looking at switching to a 5yr fixed rate at this time or ride out the variable mortgage until we start seeing the BoC increase interest rates again? I assume there is very little chance that variable rates can drop further at this time

  • J says:

    Hello, is 5 yr variable insured prime -1 available ? whats the best 5 yr variable rate out there? i got offered 1.64% 5 yr variable in Winnipeg

  • Rob, I think you are underselling your abilities when it comes to rates. Other than missing the surprise rate hikes in the summer of 2017, your comments on the direction of rates have been quite reliable over the past 5 years.

    And for “near”, I mean within 10-15bps. That’s been my experience with TD, Scotia, & BMO over the past several years dealing with low-ratio mortgages.

    I agree taking a 5yr fixed from a “fair penalty” lender is a reasonable recommendation when they can be found. It would help if you had a filter option on RateSpy to show who they are. Other than Motus, I don’t recall you writing about any (for 70-80% LTV).

  • ETFer says:

    I guess the good news for long-term MIC investors is that rates and yields will rise if other investors get scared and liquidity dries up.

    • The Spy says:

      Hi ETFer, No doubt, flow of capital into MICs will wane as it often does during recessions. Some (not all) MICs will taper lending somewhat and adjust pricing accordingly.

  • Dan says:

    Question: My mortgage term ends in August, I am currently with Simplii and have always gone with their variable rate. I see they have a special 5 yr fixed rate of 2.27%, why would they only offer me their posted rate of 4.89%?

    I am asking you first instead of them, with the hope I can negotiate something better than 4.89%. Wouldn’t they be worried that I’ll leave for one of the better rates out there? It doesn’t make sense.

    • The Spy says:

      Hi Dan,

      Some lenders try to throw the you-know-what against the wall, to see if it sticks.

      They try to scare borrowers with high posted rates, only to quote a “special offer” when you call them. Then they hype how you’re saving an entire 2.62 percentage points off the sacred posted rate, blah, blah… The strategy is called “anchor pricing” and it’s a classic psychological ploy. If you’re a qualified borrower who can get approved elsewhere, don’t fall for it.

      Negotiate hard using the rates you see on this website. If your mortgage and amortization are big enough to warrant switching lenders, or you can find better features elsewhere for a similar price (all fees considered), give switching consideration. It only takes 3-5 hours of your life.

      Here’s a calculator to check the rate savings:

      Good luck!

  • Helen says:

    Dan, I was with Simplii for 20 years and now I’m up for my renewal. They offered me 1.95% variable and I’ve gone elsewhere for 1.79% variable, 5 year term. I’m switching. Loyalty doesn’t pay.

  • Tarek says:

    I’m a new borrower and I have been offered variable at 1.9% and 5 year fixed at 2.1% (2pts difference). What’s your recommendation please? which one makes more sense for a new borrower? Thanks

  • Chris says:

    looking for advice on whether I should lock in now to a fixed mtg from a variable LOC. which is currently at 1.64%. They are offering 2.19% 5 year fixed.

  • Mara says:

    I want to renew my mortgage with B2B for my vacation home.
    Due to my personal situation (single income for 2 mortgages but excellent paying record) they offered 5 years fixed 3.14% or 2.9% variable.
    What do you think?

    • The Spy says:

      Hi Mara, Those rates obviously aren’t great. I’m guessing you don’t qualify with another prime lender? Have you spoken with a broker to assess your credit and debt ratios? Either way, you should at least make an attempt to negotiate with B2B, citing other competing offers you’ve found in your research.

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