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Variable rate mortgages haven’t looked this attractive in years.
That’s not to say they’re the right choice for people buying a home or renewing a mortgage. If you have some financial stress in your life already, a fixed-rate mortgage is a better choice. But if you want to lock down a very low rate today and are OK with the idea that it could rise in the months and years ahead, then consider the variable rate.
I wrote a column talking about the benefits of variable-rate mortgages in late March. One of my arguments was that the penalties for breaking them are typically much less than for fixed-rate mortgages, while the other was that they’re cheaper than the fixed option. Since then, fixed-rate mortgages have become an even better deal. According to Ratehub.ca, the differential between the best fixed and variable mortgage rates recently hit 1.04 per cent, which is the largest gap since Dec. 1, 2011.
A quick check with a few mortgage brokers via their online rate sheets showed the differential between five-year fixed and variable was closer to 0.80 to 0.85 percentage points – 2.41 per cent for variable at one firm, and 3.24 per cent for fixed. But that’s still a substantial savings. It would take four increases of 0.25 per cent in the Bank of Canada’s overnight rate to make a variable-rate mortgage more expensive than the current cost of a five-year fixed rate mortgage. The overnight rate influences the prime rate at banks, which in turn guides variable-rate mortgages.
One mortgage broker wrote this week that the great deals on variable-rate mortgages have changed his thinking. “Over the past few years my advice has generally favoured five-year fixed over five-year variable rates,” he wrote on his blog. “Today, the inherent uncertainty in variable rates remains, but its increased potential saving may now be worth the risk.”
About 68 per cent of mortgage holders have a fixed-rate mortgage, 28 per cent have a variable rate and 4 per cent have a combination mortgage, according to a report issued last fall by Mortgage Professionals Canada, which represents mortgage brokers.
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Rob’s personal finance reading list…
Help for retirees working through the rent vs. own debate
A useful summary of the pros and cons for both renting and continuing to own. Seven points in favour of renting, four against.
Would you like driving lessons with that luxury car?
Makes sense if you’re treating yourself to a more powerful vehicle than you’re used to. Here, someone driving a Mclaren 720 slams into an Audi R8. What a waste.
How to calm the shopping impulse
New research shows you can fight the impulse to buy stuff by considering the things you already own. Tempted to buy some clothes? Take a look at what’s already in your closet.
Want to live longer? Drink less
More than five drinks a week on average can take years off your life. I’m writing about life expectancy for my Portfolio Strategy column this Saturday.
Today’s featured financial tool
Here’s an easy-to-use online calculator that can help you create a quick budget for your household.
Ask Rob
Q: “Imagine you are 45 and still had a lot of retirement saving left to do. How would you invest the $60,000 (pension contributions from a previous job) you placed in a locked-in retirement savings account (LRSP) trading account?”
A: I’d give a lot of thought to using one of the new balanced ETFs introduced this year by the low-cost investing firm Vanguard. As I noted in this recent column, there are portfolios for conservative, middle-of-the-road and aggressive investors. Each is a diversified portfolio in a single package. The management expense ratio for the three should come in around 0.24 per cent. It would cost just under $10 at most online brokerage firms to invest in one of these ETFs.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length.
In case you missed these Globe and Mail personal finance stories
- This couple has $2.5-million in assets and no liabilities - but can they afford to retire?
- Snowbirds, will there be tax to pay when you sell your U.S. property?
- Why Air Canada is abandoning Aeroplan—and what that means for your points. (for Globe Unlimited subscribers)
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Rob Carrick