First-time homebuyers and fixed rates

While the growing popularity of variable-rate mortgage products shows no sign of abating, many first-time homebuyers continue to prefer the security and stability offered by fixed rates.

That’s the view of Winnipeg-based mortgage professional Caily MacGregor (pictured), a broker with One Link Mortgage, who told Canadian Mortgage Professional that many new entrants to the market value the knowledge that their rate will remain secure throughout the course of the term.

“I deal with a lot of first-time homebuyers and they tend to be in a fixed mindset, which I don’t blame them for,” she said. “They don’t know the ins and outs of budgeting for a mortgage; they don’t really like the idea that the payment could change.

“They’re a little bit more apprehensive when it comes to variable. This typically will be a five-year home for them, so they would like to set some roots and figure out what this whole mortgage thing is about before they’re going to start looking at the different options between fixed and variable.”

MacGregor said that many of her existing clients whose mortgage is approaching renewal, by contrast, are more likely to choose a variable rate – particularly if their plans for the coming years may include a possible change of scenery or relocation to a new property.

Read next: What’s impacting Manitoba’s mortgage market?

While clients who opt for variable rates are normally comfortable with rate increases, having more flexibility to pay than new entrants to the market, MacGregor said the need for first-time buyers to budget stringently means that they often feel more secure in a fixed-rate arrangement.

The likelihood that first-time buyers will stay in their property for the full five-year term is also usually higher, with the need to build equity more pronounced than for Canadians who have already established themselves in the housing market.

Choosing a variable rate, meanwhile, is often a solid option for homebuyers who anticipate a move within the next few years, with the penalty for breaking a variable mortgage normally far less punitive than fixed-rate penalties.

“On the variable side, a lot of the clients whose mortgage is coming up for renewal – maybe they’re not going to be there for five years,” MacGregor explained. “So they love the idea that they know what their penalty’s going to be, that three-month interest penalty, and they’re going to have aggressive savings in the first couple of years.

“That’s where the mindset is kind of different – those people are thinking [that] this might not be a five-year new term.”

Unsurprisingly, interest rates and the likelihood that the prime rate will begin to creep upwards soon are prominent concerns among many mortgage clients. Still, MacGregor said she also emphasizes that any increases to that rate are likely to be modest and gradual.

“A lot of the clients are in my mindset as well: they talk about increasing the prime rate, but for [the Bank of Canada] to aggressively increase it would be very shocking,” she said.

“Prime rate’s affecting everyone’s lines of credit; for the government to come out hot with these kinds of increases, I couldn’t see happening.”

Read next: The case for variable rates

Away from that fixed vs. variable debate, MacGregor noted that feverish competition and multiple offers on properties continued to be a major theme in the Winnipeg housing market, with the continuing trend of condition-free offers remaining prevalent – something that’s mirrored in many markets across the country.

“That’s what concerns me – when first-time homebuyers are getting into the market and they’re waiving all these conditions that are there to protect them,” she said. “That’s not something that I ever tell my clients that they should be doing.”

A step that MacGregor feels could make a difference in levelling the playing field for prospective first-time buyers attempting to enter the market, and a proposal that reared its head during the recent federal election campaign, is the possible introduction of 30-year amortizations for new buyers on insured products.

“If you’re looking at an investor or someone with 20% down, they can do a 30-year amortization and first-time homebuyers still cannot,” she said. “So, they’re trying to make all these programs work at the expense of Canadians where they can just do a 30-year amortization and solve a lot more problems.”