One option still has the edge in the rate debate, according to industry executive
The future trajectory of variable rate mortgages has been a hot topic in recent weeks as speculation looms about the Bank of Canada’s plans for its benchmark policy rate.
That rate, whose movement determines whether variable rates fluctuate up or down, remained steady at 0.25% in the Bank’s latest announcement on January 26 – marking yet another month of no change since it first plummeted to that level in March 2020.
Some analysts have been quick to sound the warning bell on prospects for variable rates in 2022, with multiple Bank of Canada rate increases anticipated this year.
However, variable offerings are likely to remain a strong option for both new and existing mortgage clients despite those impending hikes, according to a prominent industry executive.
Chase Belair (pictured top), co-founder and principal broker at online brokerage nesto, told Canadian Mortgage Professional that the advantages of variable rates were such that they could well outweigh the risk associated with rate increases – particularly with the Bank likely to show a steady hand in its rate announcements this year.
“Our best variable rate today [at nesto] is 0.90%, and our best fixed rate is 2.44%,” he pointed out. “You’re going to need the Bank of Canada to work against you six times before you regret that decision from the interest rate perspective.”
Variable rates also remain a popular choice because the penalty associated with breaking them is usually much less severe than that for a fixed mortgage.
While fixed rate penalties are usually calculated as whichever is greater between the interest rate differential or three months of interest, variable penalties normally consist only of the latter.
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That interest rate differential (IRD) penalty on fixed rate products can vary between 1% and 8% of a principal balance, with six out of 10 Canadians estimated to incur that penalty by breaking their five-year mortgages within three to four years.
“Let’s say something happens in your life and you want to sell your house or refinance,” Belair said. “You’re going to wish you had the variable rate mortgage, because that provides the mortgage freedom to shop around for the best offer in that new transaction, whereas if you had a fixed rate, your penalty is so large that you’re more or less married to your current lender.”
While borrowers who are discomfited by the possibility of their rate increasing may be more comfortable with a fixed option, Belair said that he still viewed the variable rate as a better strategy for those who are comfortable with hikes – particularly since those who consulted with a mortgage professional will likely already be aware of the permutations of their rate rising.
“The majority of Canadians who access a mortgage professional and learn about the strength of the variable rate are really ignoring the headlines, because they discussed [possible rate hikes] with a professional well in advance and they knew what was coming,” he said.
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As the lowest mortgage borrowing rates in Canada spiralled downwards since the beginning of the pandemic, many mortgage holders may have investigated breaking a mortgage early in favour of a new one, only to decide that their resulting mortgage penalty would be too high to justify a change – especially if theirs was a fixed rate.
However, with short-term fixed rates having increased in the past 12 months, mortgage penalty quotes obtained by borrowers over the past two years may no longer be accurate – something that could spur more Canadians to reassess whether it’s worth breaking their mortgage before schedule, Belair said.
He also noted the ever-accelerating housing supply crisis in Canada, one that he said was likely a much bigger problem than the interest rate coverage that’s dominated news coverage in recent weeks.
New figures released by Canada Mortgage and Housing Corporation (CMHC) in January showed that housing inventory across the country remains at a record low, with the annual pace of housing starts in Canada dropping by 22% in December compared with the previous month.
“It’s unfortunate that we have this many loud and negative headlines about interest rates and so much less about supply,” Belair said. “Supply is an issue that can solve so many of the problems that we’re seeing today – and it’s one that’s not being addressed loudly enough by any entities who can impact it.”
