Just before the Bank of Canada increased its trend-setting overnight rate earlier this month, a reader got in touch to ask whether she should stick with her variable-rate mortgage or lock into a fixed-rate mortgage.
I decided to put this question to my Twitter community. Overwhelmingly, the view was to stick with the variable rate. There’s almost a religious belief that the best mortgage is one where the rate fluctuates with interest rate trends.
Now, flash ahead to mid-March. The Russian invasion of Ukraine gets worse and worse. In financial markets, there’s off-and-on concern that this war will undermine global economy growth and thereby reduce the severity of interest rate hikes to come. If that’s how things play out, then variable-rate mortgages would be even more attractive.
Variable-rate mortgages have been available with huge discounts in recent months. Several large mortgage brokerage companies showed a gap of roughly 1.5 percentage points between their discounted variable and five-year fixed-rate mortgages at mid-month. Figure on getting a rate in the high 2 or low 3 per cent range for a five-year fixed rate and something in the low 1 per cent range for a variable rate.
The Bank of Canada’s overnight rate usually goes up in increments of 0.25 of a point, but a jump of 0.5 is not out of the question if inflation intensifies. As goes the overnight rate, so goes the prime rate that banks use for their own lending. For a variable-rate mortgage to exceed the cost of a fixed-rate mortgage, the overnight and prime rates would have to rise by roughly 1.75 percentage points.
Before the Ukraine crisis, a combined rate increase of that size would have seemed severe but possible. Now, we must wait and see. Central banks around the world will need a deft touch in using higher rates to contain inflation. That could mean less of an increase, or a slower pace of rate hikes.
If you have a variable-rate mortgage, compare your rate to what’s available now from your lender in a fixed-rate mortgage. The bigger the gap, the stronger the case for staying with a variable rate.
One last thought is for people who foresee a possibility they’ll need to break their mortgage before maturity. Variable-rate mortgages typically have significantly lower breakage penalties than mortgages with a fixed rate.
ICYMI (In case you missed it) …
How the Bank of Canada rate hike will affect your mortgage
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Rob’s personal finance reading list
Have we reached peak subscription?
A look at all the subscribing we’ve done lately – TV, websites, newsletters, food boxes. Have we reached the point of overload?
Ten ways to squeeze the most out of a tank of gas
Some tips I’ve never read before, including the removal of the roof rack from your vehicle to improve aerodynamics.
Are you ruining your expensive smartphone or laptop?
Practical tips on how to care for your electronic devises, including how to charge them in a way that prolongs battery life.
How to talk to a financial pro
I really like this post – it’s advice for talking to advisers and planners when you don’t know a lot about money. One point I’d add: Do not hesitate to ask for clearer explanations. If you don’t understand, it’s on the adviser or planner to do better.
Q&A
Q: Our financial advisor draws our monthly retirement funds from our investments. How do independent investors do this themselves and how does one strategize the allotment of funds for monthly retirement money from a diversified portfolios?
A: There are many exchange-traded funds and mutual funds designed to pay monthly investment income. A portfolio of individual dividend stocks and bonds can also be used to generate income. Strategically selling some of your portfolio holdings each year might also be required. If you’re not confident with all the decisions that must be made to generate a sustainable retirement income, then fees paid to an adviser seem a good value. Two good books for further reading on retirement income are Your Retirement Income Blueprint by Daryl Diamond, and Retirement Income for Life: Getting More without Saving More by Fred Vettese.
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 and clarity.
Today’s financial tool
To mark Fraud Prevention Month in March, the Canadian Bankers Association has produced a pair of guides: One offers four simple steps to protect yourself online and the other a broader look at “cyber hygiene.”
The Money-Free Zone
BuzzFeed asked its followers for the name of a book they wish they could go back and read for the first time. Lots of ideas for all readers. Game of Thrones for sure.
Watch this
Thoughts for newcomers to Canada on filing a tax return. Available in 12 languages: Arabic, Cantonese, English, Farsi, French, Hindi, Russian, Mandarin, Punjabi, Spanish, Tagalog, and Urdu.
What I’ve been writing about
- Households were better off financially after the last two global crises, but war in Ukraine is different
- This is how much investing fees could delay your retirement
- Wealthsimple made a risky investing choice, but it might pay off due to the Ukraine crisis
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Are your parents giving you money? • Why it’s time to stop shaming the renting lifestyle • Is now the right time to buy a house? • Why are young Canadians leaving the cities they love? • Eating in: How COVID has shifted our food spending • Crisis-proof your finances? • Can you afford to live downtown? • The cost of kids
- ✔️ The housing file: The housing boom is ripping apart the financial fabric of Canada • Shut out: A well-qualified millennial home seeker throws up his hands after losing multiple bidding wars • Big city housing affordability is over – now what? • She sold her Toronto house to retire somewhere cheaper, but it didn’t work • How young adults and the whole country win with a tougher mortgage stress test for home buyers • Can’t afford your house? It’s likely not your fault
- 📈 Investing: Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you • The 2021 ETF Buyer’s Guide: Best Canadian equity funds • The 2021 Globe and Mail online brokerage ranking: Who’s best for investing … and answering the phone • Are these the stock market returns of a lifetime? • On the cusp of retirement and wondering about an ETF that pushes the limits on aggressiveness
- 💰 Your money: The five most important numbers for checking the health of your personal finances • Today’s freakishly low mortgage rates can’t last. What will pandemic home buyers do when they rise? • There’s a cost in money, isolation and family stress when seniors choose to remain in their own private homes • Taking CPP early can cost you $100,000 and limit your long term options • Fleeing the city for the suburbs? Watch out for higher property taxes, more cars and other costs
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Rob Carrick