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Fixed vs variable mortgage in 2019: Which is better for you? (and how to choose)

“Always pick your yard based on your Summer lifetstyle.”


August 19, 2019 - Karl Yeh

Planning to get or renew a mortgage? Wondering whether you should go with a variable or fixed in 2019? In this episode, we discuss fixed and variable mortgages as well as mortgage rate outlook for 2019. We provide examples of when to use variable vs fixed. Finally we explore which is better, a five or ten year mortgage term including examples of using each. 

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What we discussed:

Hi everyone, I'm Karl. Welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics, and tips from home buying experts. And remember, if this is your first time on this channel and you want to get the latest strategies from the experts, [00:00:30] hit the subscription button below. Hit the little notification bell so you don't miss anything.

So today I'm joined by Mujtaba Syed, Mortgage Specialist with the Bank of Montreal. And today we're going to talk about

Fixed versus variable mortgages in 2019

So Mo, I know we've talked about this before, but I always liked to update because it's always different. Interest rate's different, the economies change, and so on.

So, can you go over and review what is a fixed versus a variable mortgage first, and then what are some pros and cons of each?

Mujtaba Syed:            

Fixed mortgage       

So, a fixed mortgage [00:01:00] is a fixed term, meaning interest rates are fixed, term is fixed, no changes, right?

So you've agreed to a certain term, you've agreed to a certain percentage amount. That is not going to change within your term. It doesn't matter if rates go up, rates go down, you are locked in.

Variable mortgage

Variable, just like in the name, it's variable. It would vary. So it could be that the term is fixed, for example for five years. But the rate might vary. It might go up and down depending on where the economy is.

Variables are more dependent on prime rate, which is the overnight lending rate to the Bank of Canada will set. [00:01:30] And then your bank will have a prime rate based on that.

So your primary goes up, your interest rates will go up, your primary goes down, your interest rates will go down.

And subsequently if your rates go up and down, your mortgage payments were affected based on that.

Your principal portion might get effected if you have not adjusted your payment, because the interest rates have gone up, because now more is going towards interest, towards principle.

Mujtaba Syed:                  

So you want to kind of stay on top of that. With variable, it is subject to change, right? And it could be maybe not ever in the first five years, depending on where the Bank of Canada is, or the economy is.

Or it could be changing [00:02:00] quite a bit. It could fluctuate maybe on a yearly basis. It's hard to say.

But definitely something that you want to be cognizant about and keep your eye on, which is on the variable rate.

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How things look in 2019

So 2019 seems to be a great year, right? We're seeing a lot of movement in rates, more on the fixed side though. Not on the variable side. Now fixed rates, they're actually calculated differently compared to the variable rate.

Fixed rates are based on the bond market. Right now we have five year, 10 year bonds actually trading at a very, very low level, right?

Much lower than they were [00:02:30] last year. And that's the reason why we're seeing quite a bit of a decline in fixed mortgage rates.

So I'll give you an example. So January of this year, we were sitting at rates around 3.49. And as of now we're seeing rates come down to as low as 2.69 in some places. Right? That is a big difference.

We're expecting rates to drop further. It might even go down a lot lower than that. On the variable side, we haven't seen primary change at all.

So every quarter, or every couple of months, the Bank of Canada will come out, and reassess the situation, [00:03:00] where the economy's heading, and see, should we adjust our overnight rate? Or should we adjust interest rates to kind of combat inflation, or whatever it is.

As of right now they haven't decided to change anything. There are some talks that there might be a decrease by the end of this year, but once again, just speculation.

We don't know.

And if you're deciding, right now you're buying a home, should I go with fixed? Should I go with variable? It also just depends on your scenario, and depends on how comfortable you are with taking risk. Because there is some risk associated with variable.

You could go with a fixed rate today [00:03:30] and decide hey, I'm comfortable with, let's say that 2.79, 2.69 rate. I would actually go with a fixed rate so it doesn't bother you.

With a variable rate, now you're thinking, wait a minute, there's a possibility the variable rate might go down, but there's also a possibility the fixed rates might go down even further, and in variable it actually lets you do something built into a variable mortgage that a fixed mortgage doesn't have.

With a variable mortgage you can lock into a fixed mortgage at any time without any penalties, as long as a term that you're currently in is the same or greater

So let me give you an example.

So you start off [00:04:00] with let's say a five year variable rate. You've kept it for one year, you have four years remaining on your term.

You could lock into a four year mortgage term, or five year mortgage term, or a six year mortgage term.

Anything higher than what you currently have, at any time without penalties.

 Sometimes I've advised my clients to do that thinking, hey listen, you guys are willing to take a little bit more risk. Go with the variable today.

And I did that around February time and a lot of my clients took my advice, and they're very happy for it. So we got them into a variable around February time, and [00:04:30] fixed rates at that time were a little bit higher.

They were 3.49. And now rates have come down to 2.79 and my clients have actually gone and switched from that variable to a fixed and locked in their rate for 2.79. At that time they would have taken it, it would've been 3.49, so would have been a little bit higher.

So depending on your scenario, depending on how comfortable you are with taking risk, all those conversations you need to have with your lender, but a very important conversation to have, right?

Because it could totally change your mortgage payment.

You couldn't change budgeting going between a fixed or a variable rate. There's pros and cons to [00:05:00] both.

As of right now I would kind of have the conversation with your lender, but we're going to a very exciting time where rates are actually coming down. We had a little bit of a scare last year where rates had gone up as high as 3.69.

So it's really good to kind of feel like we're not in that environment. We're going to a lower rate environment, perfect time to either renew your mortgage, or to purchase a home.

Which is better: 5 or 10 year term mortgages?

Karl Yeh:

So, when we talk about terms in this market, is it better to have a five year, a 10 year term, is there anything more than 10 years in terms of terms?

Mujtaba Syed:                  

Some US [00:05:30] markets I've heard as far as 30 year terms or higher. We don't have that here in Canada, the most I've heard is the 10 year term.

So the question you want to ask yourself is that, are you comfortable being with bank A or your lender for a 10 year period?

You can get out sooner.

If you do, you'll incur some penalties to break out of a contract.

You are getting into a legal contract with your lender for that term amount. It could be a 10 year term, it could be a five year term, but you're stuck with that lender for that long. And that means that rate is locked in for that long as well

. But let's say you have longterm goals.

You feel like you're not going anywhere [00:06:00] in 10 years, and you feel like the year rate today is very, I would say, very comfortable, and you don't want to take a risk for coming up for renewal in five years.

A 10 year wait would be a really good option. Right now they're trading at pretty decent rates.

They're discounted quite a bit. You can get yourself a 10 year rate and not have to worry about it for 10 years at all. Get your budgeting in line for 10 years and just focus on paying it off.

That would be a really good strategy. But it depends on what your specific strategy is, right? Now, it doesn't work for everybody. It might work just for you.

So, once again, sit down, [00:06:30] have a conversation with your lender, have a conversation with your bank, find out what kind of goals that you have, and decide from there.

But maybe shorter, maybe longer, depends more on your scenario.

Karl Yeh:                         

Do you need to keep doing a stress test every year, or is it only just within that term?

Mujtaba Syed:                  

So, when you're first buying your home, that is when the stress test happens. It doesn't happen at renewal time either.

But does a stress test apply for different terms? It definitely could, right?

So at the time of purchase you want to go with the 10 year term. And let's say the 10 year rate [00:07:00] is 4% right? So it would be two on top of that. So it could be four plus two, which is six, which is considerably higher than the Bank of Canada or posted rate of 5.34.

So stress test is 2% over your posted rate, or the Bank of Canada's posted rate, whichever is greater.

So do keep that in mind. If you want to go for a longer term, rates are going to be higher. It might have a higher stress test, right?

It might have a higher qualifying rate to qualify on then let's say a five year term, right? Or a two year term, or a three year term.

As long as the qualifying rate plus two is [00:07:30] less than the Bank of Canada's posted rate of 5.34, you won't have anything to worry about. But if it's going higher than that, then that stress test will apply to you.

Karl Yeh:                            Perfect. Do you have anything else to add?

Mujtaba Syed:                  

I think the best thing to do right now, like I said, very exciting time, rates are coming down. We're going to a lower rate environment.

Is definitely do your research, see what rates are best for you.

Ask us questions, right? Definitely leave questions below and we'll look at, we'll get back to you as soon as we can. But what you think variable and fixed is good. We [00:08:00] can definitely steer you into the right direction.

Say hey, maybe based on your certain criteria and your lifestyle, maybe consider going with a fixed, or going with a variable. So it's a good conversation to have with yourself and with your lender.

Question of the Day

Karl Yeh:                            

So the question of the day I have for you is, did you choose a fixed versus variable in your last mortgage, and why? Or if you're planning to buy a house in the future, are you planning to go with a fixed or variable, and why as well? Let us know in the comments section below.

So if [00:08:30] you want to know more about mortgage rates, we've got a great video series here, as well as a step by step on how to get a mortgage, which you can see a video series here as well. Don't forget to subscribe to keep learning from the experts. And I'll see you in our next video.


Your turn

Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts.  

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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