It seems we may be seeing it in the mortgage industry as well. In the past few weeks, there have been number of articles speaking to the virtues of variable-rate mortgages.
Are variable-rate products quickly becoming the better option?
Remember the days of 5-year adjusted rate mortgages (ARM) priced at PRIME – 75 or even PRIME – 90? If you were fortunate enough to have one of those products and stayed with it over the course of the term you’ve come out a winner. Since the last PRIME – 75 funded approximately four to five years ago, those rates havebecome extinct and now those of you renewing your mortgages have a choice to make.
Should you renew into a current ARM product at PRIME – 40(ish)or take the security of a fixed-rate term in the fear that rates will continue to rise?
Economists are predicting the Bank of Canada will hold the overnight rate steady into 2014. That said, take these predictions with a grain of salt as many of those same economists had already called for increases back in 2012 and 2013. Economic conditions change and so do outlooks and forecasts.
Relatively speaking, variable-rate mortgages are cheaper today at PRIME (3%) – 40 than they were five years ago when they were at PRIME (4.75%) – 75. The spread between fixed rates and variable rates is sometimes referred to as the “rate premium” or even “fixed rate insurance” and is a good evaluator of the attractiveness between fixed and variable.
This time, five years ago, that spread was approximately 150 basis points (5-yr. fixed rates averaged 5.50%). Today that spread is around 100 basis points. If that spread grows, variable-rate mortgages will again become more attractive compared to their fixed-rate counterparts.
Before making any final decisions keep in mind two last items. First, in late 2008 both fixed rates and PRIME were dropping. Today, PRIME is remaining flat for the time being while fixed rates are rising. Second, credit and lending guidelines have changed significantly in the past five years.
Today’s borrowers are better qualified and have fewer opportunities to defer interest costs using extended amortization and lower down payment options. Those who are willing to take the additional risks of variable products are better equipped to do so than those in the past even though the risk premium is effectively higher than it was five years ago.
That said, our rate environment today compared to August 2008 is quite different since both variable and fixed rates do not seem to be dropping. To really understand the best option, it’s best to discuss these factors with your dedicated mortgage broker. I will review the various products available and can help you select the best one that fits lifestyle and financial goals.
In the end, market volatility breeds uncertainty but it also brings opportunity. This is an ideal time to talk mortgage strategy. The strategy is vital and is,in many respects,more important than the rate.
It may be time to consider the variable rate or, from a historical context, it may still be a great time to consider locking in to a fixed-rate product. Either way, I encourage you to you to be proactive and seek out advice.
Guy Ward is a Mortgage Broker in Calgary, Alberta with TMG (The Mortgage Group Alberta).