Earlier this week Rob Carrick of the Globe & Mail wrote an article Variable or Fixed? It’s no contest. As a regular observer and reader of mortgage news I am rarely enthusiastic about the media’s mortgage rhetoric however this week’s article was timely and perfectly expresses why in today’s market the fixed rate mortgage is king. This coming from a mortgage broker who has arranged variable rate mortgage for the overwhelming majority of his clients.
To sum up why fixed rate mortgages are the way to go here are the highlight:
- Over the past 30 days lenders have decreased the spread on their prime minus mortgages due to thinning profit margins. Most variable rate mortgages today are priced at prime (3.00%) if you are lucky you might find prime minus 0.20 (2.80%).
- Fixed rate mortgages have held relatively steady since the end of August and a fixed 5 year is priced between 3.50%-3.60%.
- When variable rate mortgages were 2.25% 30 days ago vs. a fixed at 3.50% the difference of 1.25% was worth the risk of a variable rate mortgage for the majority of borrowers. Now that the difference between fixed and variable is only 0.50% it is difficult to justify the potential volatility of a variable rate mortgage.
Of course there may be reasons why a borrower would want to consider a variable rate mortgage under certain circumstances but today’s market is effectively pushing borrowers into fixed rate mortgages. Whats more I am anticipating a further drop to fixed rate mortgages as Canadian bond yields appear to be trending down wards which could cause a slight dip to fixed rate mortgages.
Here is a short history of Variable Rate mortgages discounts:
pre-financial crisis (2007): prime minus 0.9 to 1 percentage point (at best)
mid-financial crisis (2009): prime plus 1
post-financial crisis (2010-2011): prime minus 0.75 to 0.8
now: prime to prime minus 0.2