Variable rates in 2022: what's in store?

Speaker1: [00:00:13] Hello again, and thanks for joining us for another edition of PTV. I'm Fergal McLinden, news editor at Canadian Mortgage Professional. And today we're going to be delving into a topic that's dominated headlines in the mortgage market since the start of the year. We've known for a while that increase it to the Bank of Canada's benchmark policy rate are all but a formality in 2020, too. But with variable mortgage rates typically moving along with that central bank rate, what are the possible repercussions for the fixed versus variable debate that we hear so much about? And should your clients be worried? Joining me today to discuss that topic and more is Leah Zlatkin, broker at Mortgage and Lois Rates, the expert based in Toronto. Leah, thanks for joining me today.

Speaker2: [00:00:54] Thanks so much for having me. It's really a pleasure to speak with you today, Fergal.

Speaker1: [00:00:59] I wanted to start on that question about whether impending rate increases should be a cause for concern for variable mortgage holders. What do you think?

Speaker2: [00:01:08] So in the case of many of my clients, I'm not too concerned when we hear that variable rates are going to be increasing because of Bank of Canada overnight rate. This is something that we've always known could happen. I mean, rates have been at a record low for the last little bit. And so we do expect those rates to come. It's one of those situations where for many of our clients, it's more about having the conversation around how comfortable are you with seeing these increases or seeing your amortization lengthen as opposed to a conversation about, Hey, these changes are coming. You didn't know that they were going to happen. Everybody knows that with a variable rate mortgage, your rate could change or you could see increases coming. And I think that the expectation that, you know, in terms of will rates continue to rise, it would take 150 basis points increase to bring the overnight rate back up to where it was before the pandemic, when the emergency measures sort of took place and the stress test is still at five point twenty five percent. So I don't think for many of our clients, they should be concerned about these things. Everybody can still afford their mortgage payments, in my opinion.

Speaker1: [00:02:14] So it sounds as though your advice is no matter what happens with the next couple of Bank of Canada rate hikes, customers don't really have any need to panic because they're likely to be fairly mild. Would that be the case?

Speaker2: [00:02:24] Yeah, I would say they are likely to be quite mild in terms of the changes. I don't think the Bank of Canada would do anything drastic. I think we're going to see zero point two five percent incremental changes or three point twenty five incremental changes over the next couple of rate hikes. If we do see them. And again, these are not going to be anything drastic that consumers or your customers should be sort of losing sleep over. These are all things that people know could be coming your stress tested in order to ensure that you can continue making your payments, regardless of those those increases. And aside from that, many mortgages are actually designed to amortize over a longer period of time as the rate increases. So for many of your clients, they may not even see that rate hike as a change in their budget in terms of how much they need to open up their wallet.

Speaker1: [00:03:16] For customers who are inclined towards a fixed rate product, it's usually that sort of peace of mind aspect that entices them is not the main factor behind clients who are going for that product or are there other considerations to

Speaker2: [00:03:31] Within my client base? I typically see a couple of people that gravitate towards fixed rates. Now, the people who tend to gravitate towards fixed rates might be more traditional Canadians. Maybe they're a little bit older, they feel more comfortable with something that they know is going to be quite stable. They might have had a time in their life where they saw rate change quite a bit in terms of their mortgage interest rates, and they might be still hesitant because of that. So it's typically older Canadians. And then I also see some first-time homebuyers who are also pressured into the idea that they should be going with a fixed rate because mom and dad are helping them pay for that down payment. And mom and dad have a very traditional mindset that, hey, you need to be stable, you need to make sure nothing's going to change, you want to stay on the same footing and here's the best path to get there. So if mom and dad have a strong inclination towards fixed rates and mom and dad are helping junior pay for their mortgage or pay for their first home, in that case, they are also tending to gravitate towards fixed when it comes to clients like this. The first recourse I typically have with them is I speak to them about where they see themselves in two years, five years, 10 years, and when I speak to a client, I'll ask them, you know, in the last five years, have any of the following changed? Have you had a kid? Have you had your in-laws move in with you? Have you needed to move for work? Have you wanted more space because of COVID? Have you had any of these big life changes that might require a refinance or a different style of home or a bigger home or a smaller home? And typically, clients are answering yes to one of those many questions about the last five years.

Speaker2: [00:05:14] So based on the last five years, if you know that your life changed several times over the last five years and you're predicting that in the next five years, your life might change again, maybe there's going to be a marriage, maybe there's going to be getting together with somebody who also owns their own property. You know, any of those life changes. Typically, I'm suggesting to them, well, at that point, you're going to incur an IRS penalty. And when you incur an earned penalty if you're breaking your fixed mortgage, is that more desirable for you that you're potentially risking a big change when you have that penalty? Or do you prefer knowing that that change is coming with variable rate increases? And so I try to frame the conversation that way if a client is still super adamant that they want a fixed rate. Absolutely. I'm going to go with what the client wants, but I want to make sure that I'm explaining to them what the potential risks and the potential outcomes are in both situations.

Speaker1: [00:06:08] I suppose one of the other great unknowns about these interest rate hikes when they come is what impact they're actually going to have on the market itself. We've had such a crazy market over the past couple of years, partly because rates have been so low. What do you think the impact is going to be? I mean, do you think there will be some kind of cooling down as rates go up?

Speaker2: [00:06:28] It's hard to address that question, and the reason why it's hard to address that question is because the potential that the Bank of Canada overnight rate will increase doesn't have a direct impact on people who are looking to purchase their home. When you're looking to purchase a home, either you've got an a pre-approval where your rate is much higher than what you're probably going to get anyways, or you have yet to get that pre-approval, so you're going to lock in at whatever that day's rate is once you actually make your purchase. So the real people who are impacted by the Bank of Canada overnight rates changing are people who already have a mortgage. And because of that and because the stress test is not changing, I don't know how much of an effect it would have on cooling the market, so to speak, in terms of the market being dictated by people who are usually making purchases.

Speaker1: [00:07:22] And I want to step away from the interest rate question a little bit and just talk to you about some of your the main things that you're hearing from clients, but their concerns at the start of this year. What's the most common things that that come up whenever a client is discussing a mortgage and their fears and concerns with you?

Speaker2: [00:07:39] You know, a lot of people talk about affordability, right? Like, that's a that's a big factor. A lot of people are talking about affordability, whether it's, you know, OK, we have our property we can afford to refinance right now or we want to take out money for an investment property or whatever. But gosh, my kids, what's going to happen to them? Can they buy a house or know young people trying to get into the market who have a very set budget? Maybe they know that they can spend nine hundred thousand, but they can't really go above that because of their jobs, their income, the inability to get a co-signer, any of those other factors, and they know how much their set amount for down payment is. A lot of those first-time homebuyers are talking to me about affordability as well. Well, shucks, how does it work that we can't buy a home? We've got two great jobs. I'm a teacher. He's a lawyer. How does this work? Why can't we buy something great? And so for a lot of people, I think affordability is the primary thing that they're asking me about, and that's not necessarily something that we can change unless we, of course, get higher paying jobs or, you know, have a different income situation happening or potentially if we save up more money.

Speaker2: [00:08:52] And for many of those people, when you present those two options to them, OK, well, you either need to get a higher paying job or get a co-signer or put more down. For many people, they feel that they might miss the market if they wait to save up a little bit more things like that. So I think affordability is a big question in many people's minds. But you know, just like any situation in life, you have to weigh the costs and benefits. And maybe for somebody who might be, you know, purchasing high ratio, it makes sense to purchase high ratio right now, get into the market, get a place and get started. And for some other people, it might make sense to wait until you've got that 20 percent down and buy a home where you're going to be spending a little bit more on a down payment, things like that. To each their own and everybody's in a very different circumstance. But across the board, we do hear a lot about affordability being something that people are concerned about.

Speaker1: [00:09:43] We're sure. And one last question for you before I let you go. Something that I ask most of the brokers that I interview. Is there anything that you would like to see done at either a federal or provincial level that would considerably make your life easier as a broker or even make things easier for your clients?

Speaker2: [00:09:59] That's an interesting question. There's actually been a little bit of talk lately in the marketplace around, you know, what can we do as brokers or as people who deal with, you know, affordability and things like that to help people? And one of the things that I've actually been considering quite a bit is that in the last two years, we've seen quite a few new entrants into into our profession. So we've seen a lot of people come into the world of mortgage brokering or mortgage agents if they're obviously newer. And one of the things that I've noticed is there's not a lot of training, there's not a lot of help or development for new agents. And in general, one of the things that I find is that really real world experience is the best indicator for success in this role. And if you are simply reading the textbook and you are simply passing your exam to become a mortgage agent or mortgage broker, you're missing 90 percent of what is required to be successful. And while we have relicensing on a regular basis, the real crux of of knowledge comes from tacit, tacit learning. Seeing other people do file sharing your experience with them, understanding how different lenders work, actually going through the struggles of submitting a file with this particular lender and realizing that there's some nuances, things like that.

Speaker2: [00:11:23] So I honestly feel like one of the things that might be a great improvement for many of us would be, you know, an apprentice style learning structure for new agents. And, you know, I don't think that change is coming anytime soon. But as a new agent, I think many people should be considering how they're getting their training and whether their brokerage offers really good training ahead of time, because I think that we're a huge disservice to the Canadian population and the Canadian public when we don't actually know what we're doing and when somebody is operating in a silo and they're not well trained in terms of the art that we work in. It's a real disadvantage to the greater marketplace when somebody has a bad experience with one broker that translates into them a bad experience with every broker. While all brokers are not competent or are this or that and we as a whole need to present ourselves really well in front of the Canadian public because I think we do offer a much greater value than the bank. And in order to do so, we need appropriate training for our new agents.

Speaker1: [00:12:27] Ok, well, certainly food for thought will be keeping an interested eye in the coming months on all of the topics that we discussed today. For now, we're going to leave it there, and I want to thank you for coming on and sharing your insights with us today. We really appreciate it.

Speaker2: [00:12:40] Thanks so much, Fergal. It's always a pleasure talking with you.

Speaker1: [00:12:44] Thanks to you for joining us. Stay tuned for more great coverage in the future from CNN, PTV. We'll see you very soon.