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A house for sale on the real estate market in Toronto. (Mark Blinch/Mark Blinch/REUTERS)
A house for sale on the real estate market in Toronto. (Mark Blinch/Mark Blinch/REUTERS)

Personal Finance

Variable or fixed? It's no contest Add to ...

Variable-rate mortgages are so over.

Go fixed rate if you’re arranging or renewing a mortgage, and think hard about the four-year term. If you take in all the recent developments in the mortgage market, this is the most logical strategy.

Variable-rate mortgages are being sold at the prime rate in many cases right now, which is 3 per cent. The traditional discount off prime? Snuffed out by the banks. They’ve decided they aren’t making enough money from discounted variable-rate mortgages, so goodbye discount for the most part. If you shop around, maybe you’ll get 0.2 of a point off prime.

Now for the fixed-rate alternative. Global economic uncertainty and sluggish growth mean you’ll pay in the area of 3 per cent for a four-year term. This explains why veteran mortgage broker Peter Majthenyi has pretty much given up on variable-rate mortgages.

“For 10 years, I’ve said don’t waste your money on a fixed-rate mortgage,” Mr. Majthenyi said. “Today, I just cannot in good conscience put a borrower into a 3-per-cent variable when for the same rate I can put them in a four-year fixed.”

Mr. Majthenyi calls this a “temporary break” from variable-rate mortgages. He’ll see what happens when today’s four-year terms expire. Meantime, he’s gone from writing about 98-per- cent variable-rate mortgages a year ago to virtually zero now.

Numbers from the Canadian Association of Accredited Mortgage Professionals (mortgage brokers, to put it in English) show that variable-rate mortgages had about one-third of the market as of this past spring, compared to 21 per cent four years ago. Interest in variable-rate mortgages was as strong as ever going into the summer as a result of an uncertain global economic outlook that was expected to keep interest rates low. Variable-rate mortgages could be had back then for 2.25 per cent, which represented a discount off prime of 0.75 of a point. Four- and five-year fixed-rate mortgages would have cost roughly 3 to 3.5 per cent, and that included a strong discount.

This was an ideal environment for variable-rate mortgages. The prime rate, used by lenders as a reference for many of their loans, was low and expected to stay that way for as long as it took for the global economic mess to resolve itself. The prognosis was for continued savings versus a fixed-rate mortgage.

Then came two developments that led to Mr. Majthenyi’s 180-degree turn against variable-rate mortgages. One, the cost of fixed-rate mortgages fell a little as a result of the stock market uproar in August and September. Here’s how that worked: Money flowed out of stocks and into bonds, which set the trend for mortgage rates. When a bond’s price rises, its yield falls. And so, as bond yields moved lower in the late summer, so did rates on fixed-term mortgages.

The second development was a decision by the big banks to clamp down on discounts given to customers going variable. “Bottom line, the banks have been stuck with too many variable-rate mortgages that are not profitable,” Mr. Majthenyi said. “How do they make them more profitable? They have to increase their profit on each mortgage.”

A few mortgage brokerage firms now advertise variable-rate mortgages at 2.8 per cent, or prime minus 0.2 of a point. But Mr. Majthenyi said many of the big lenders he deals with as a broker are now at prime. Looking ahead, he sees the market settling into prime plus or minus 0.2 for variable-rate mortgages.

You may still be able to save a token amount with a variable-rate mortgage over a fixed-rate mortgage with a term of four or five years. But it’s not hard to imagine the advantage of the variable rate disappearing in a year or so as the economy rallies. Then, you could be looking at a long period of rising rates.

So get over any ideas you have about variable-rate mortgages being cheap enough in the here and now to overlook the risk posed by future rate increases. In today’s market, variable-rate mortgages are yesterday’s news.

Finally, a quick word from Mr. Majthenyi for people who are in the middle of variable-rate mortgages with those juicy discounts of days gone by: Enjoy.

“You should hug and love those mortgages to the last possible moment because you’re probably not going to get them again.”

Follow me on Facebook. I’m at Rob Carrick – Personal Finance.

A short history of variable-rate mortgage discounts

pre-financial crisis: prime minus 0.9 to 1 percentage point (at best)

mid-financial crisis: prime plus 1

post-financial crisis: prime minus 0.75 to 0.8

now: prime to prime minus 0.2

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