Mortgage 101 – Why Borrowers are Choosing Variable Rates

In this live Mortgage 101 episode, Dan and Clinton covered Financial Literacy Month, the Bank of Canada rate increase, and how mortgage products respond to changing rates.

Dan Ahlstrand
Welcome to a special live edition of Mortgage 101. We’re on Facebook. We’re on YouTube this afternoon, and as always, sitting right next to me as we do every month on this show is our friend Clinton Wilkins. Clinton, how are you?

Clinton Wilkins
I’m doing just great, Dan. How are you doing?

Dan Ahlstrand
Happy Halloween!

Clinton Wilkins
Happy Halloween to you as well, and to all our listeners. We just made it through Halloween; it’s the first of the month. So, if you’re listening to us at another time, we’re going to be on FM here later this weekend into next week, as well as on Spotify and Apple Music and wherever you get your podcasts. But we have a bunch of people signed up to watch our live stream today. And if you’re watching it later and it’s not live, that’s cool too. But I just want to let everyone know that we’re going to be answering some comments live as well. So if you want to ask us a question, ask us on Facebook. We’re also on Google. We’re live streaming on Google. But if you have a question, ask us on Facebook, and we’ll try to jump on and answer as many of those questions as we can.

Dan Ahlstrand
The reason why we’re doing this special live edition of Mortgage 101 is that we’re kicking off Financial Literacy Month, which is the month of November. And traditionally, Clinton, you’ve always done a live show to sort of reinforce how important it is to know what your money is and how it works for you.

Clinton Wilkins
Yeah, of course. And Financial Literacy Month is so, so important, and we really break it down into three pillars: one being income, one being assets, and one being credit. And we’re going to be doubling down, tripling down, probably on our content this month. And those are really the pillars that we’re going to be talking about. We’re going to talk about that today during our show, as well as all the content that you’re going to get from us, whether that’s email or blog posts, that it’s all going to be focused on those three pillars. And I mean, that’s what’s most important to people. I think there’s a lot of stress going on out there right now, Dan. Right. With what’s going on with inflation, questions about what’s going on with interest rates, and we want to be here with you to make sure that you understand and you’re getting the best advice.

Dan Ahlstrand
The big story these last few weeks, and certainly has been on the minds of Canadians and mortgage holders, and those that are perhaps getting into the mortgage world, is the Bank of Canada. The Bank of Canada came out with a decision in the last few days that they’re raising the interest rate by 25 basis points, Clinton. I know that this was maybe a 50-50 in the community about how this was going to go. The Bank of Canada and Governor Tiff Macklem decided to raise the rate. Your thoughts on that?

Clinton Wilkins
I think now that we’ve come through the announcement happening, I can tell you it was a bit chaotic that day because I think by and large our team we thought that it was going to be a hold. I think the Economist was 50/50. We had polls on Instagram and on Twitter. It was 50/50, 60/40, that maybe there was going to be an increase. For me, I think it really all comes down to inflation. And I think the more that I think about it, inflation obviously was the biggest driver. But now, since that increase has happened, people are like, “Well, we’re going to see more increases.” But now we’re seeing articles that job numbers and GDP stay the same, with more increases in the future. Again, we’re going to have to watch it. The situation changes. I think so rapidly that we need to remember that what’s going to happen in six weeks or two months from now. There’s a lot that’s going to happen out there in the world between now and then.

Dan Ahlstrand
Tiff Macklin, when he was announcing the decision, focused a lot on energy prices,d and I mean tons of oil and fuel. If you’re listening to us today, you don’t have to go very far in your neighbourhood to see that impact, right? Just go look at the price for gasoline and for oil on the markets, and that continues to be in flux.

Clinton Wilkins
Yeah, it definitely does, and I mean that’s really impacting people and the dollars that they have in their pocket every single month. I see when I go to the pump, you used to be able to fill up for less than $100. Now you’re filling up for $150, and in a lot of these cases, we’re having a direct impact from that cost. And it’s not. I think we need to remember that when we’re filling up, it’s not just us filling up; it’s tractor-trailers filling up, and other modes of transportation that move the goods that we are buying every day, and that’s driving up some of these other costs, but primarily being driven by that cost of fuel.

Dan Ahlstrand
And there’s also geopolitical pressure on the economies around the world. There are midterm elections in the United States happening very, very soon, and the world is watching that. And we still see conflict in the Middle East. Things don’t look like they’re going to get any better in the short term, anyway.

Clinton Wilkins
I always am cautiously optimistic, right? That we’re in a stability-type situation. Things can get better, and obviously things can get worse. And I think when we’re deciding rates and rate products, we need to understand what the risks are, but what the potential benefits are as well. And it doesn’t matter what decision you make, whether you decide to do a variable rate product or a fixed rate product. There’s going to be pros and cons, and I think that we need to remember that, and the cost of borrowing obviously is one of the factors. Stability is another, but there’s also something that we sometimes don’t think about: what are the features and the benefits of that product? What’s going to happen if you potentially need to break that mortgage early? We’re seeing that right now. Clients who got mortgages two years ago, three years ago, and the rates were very high at almost 7%. And when they have to break them early, they’re paying very high penalties to get out. Whereas in a variable rate product, you’re only always paying three months’ interest, and you also have the upside of converting that variable rate product into a fixed rate at any time with no penalty with your current lender.

Dan Ahlstrand
Now, the Bank of Canada decision has obviously a profound impact on what happens in the variable rate mortgage world, but it doesn’t have an impact on what happens in that fixed rate world. That lives in the bond market, and we talked about this last month on the show. The bond market has been in a state of flux over the last few weeks.

Clinton Wilkins
It certainly has been. We’re watching that very carefully, and I think that’s where maybe there’s a little bit of misconception as well, Dan, and we’ll kind of debunk this or whatever the right word would be. When the Bank of Canada decides to, oh, increase the key overnight rate, it has a direct impact on anybody who’s in a variable-rate product, the prime rate, but that doesn’t impact the fixed rates. Yes, a Bank of Canada decision can impact the bond market, which is then being driven by those fixed rates, but those fixed rates were already up, and they were already going up before the Bank of Canada made their decision. Because oftentimes they’re pricing in some of these decisions in advance. So yes, we saw it going up and down as these decisions are being made, but there’s not a direct one-to-one correlation. And I think in this specific case, the fixed rates were already on the rise before the Bank of Canada even decided to increase this key rate.

Dan Ahlstrand
So somebody calls you today or on Monday and says, “Clinton, what product do you recommend that I get into? What’s the bottom line? What’s the best product to be in?”

Clinton Wilkins
I would say before this Bank Canada announcement, 90% of our borrowers were taking a variable rate. As crazy as that sounds, historically it’s around 40%. I think our clients are probably about 50%. But there was a huge increase in the number of borrowers that were taking a variable rate. One, the fixed rates are a little bit higher, and they’ve been increasing. But two, the spread between where the variable rate product is and where the fixed rate product was was very high, like we’re almost like 100 basis points, so 1% almost in the difference between where a variable rate product would one where a fix was. So that’s why a lot of customers were taking a variable today. That spread has reduced a little bit more, maybe now at 75 basis points or 80 basis points in a lot of cases. So I think we’ll see some customers choose to do a fixed rate now just because there has been an increase. It creates a little bit more uncertainty, and I think in some cases borrowers are willing to take a higher interest rate just to have the stability, even if they know it’s going to be higher during that term. But I would really encourage folks: if you’re going to do a fixed, I like a shorter-term fix, like a three-year fix. I think right now is going to be good. Historically, if we go back the last 25 years, 60% of borrowers were taking a five-year fix, but that certainly is not the case today. They’re doing variable, and they’re doing shorter-term fixes.

Dan Ahlstrand
For those on the outside looking in who maybe are in a fixed mortgage or maybe don’t have a mortgage. When we talk about a variable rate, when there’s an increase, as we saw with the Bank of Canada, Clinton, what does that mean for my mortgage? Does my payment immediately go up?

Clinton Wilkins
If you’re in a variable, there’s two different ways it could it can happen. If you have an adjustable product, that means that the payment is going to adjust, so the payment will go up. If you have what we call a standard or a classic variable, where the amortization is going to change, the payment stays the same, but your amortization will get longer. Some lenders impacted that change overnight in terms of the cost of borrowing, and other lenders will adjust it basically as of November 1. So, depending on your lender and depending on your setup, overall your cost of borrowing is becoming higher. Is your payment going up, or is your amortization getting longer? It really depends on the product that you have. If you have a home equity line of credit, your cost of borrowing is going to be higher. If you’re in if you’re in a fixed rate, there’s no impact. But I can tell you that even before theBank ofk Canada met, the fixed rates were already increasing and had increased quite a bit. So a lot of the fixed rates today are edging up to around 5%, Dan. But right now you can still get a variable rate, , sub 4% or around 4%. So variable rates still are looking attractive, even though there has been a 25 basis point increase. Maybe not as attractive as they were before the Bank of Canada did the increase, but I think it’s certainly worth a conversation. That’s where having the advice of an unbiased mortgage professional is so important, just because the difference between the product obviously is important, and different lenders are offering different rates, and and there’s different solutions. And really, with Financial Literacy Month, we’re talking about your income, your assets, and your credit, but that’s the same thing we do when we meet with our customers, right, and we’re diving into their finances, and we’re trying to give them the best solution for the product that they need and the situation that their life is in right now.

Dan Ahlstrand
We have about 30 seconds before we have to take our first break here on this special live edition of Mortgage 101. Clinton, crystal ball, we know that there’s another decision coming before the end of the year. What’s your gut telling you?

Clinton Wilkins
I am going to predict a hold. There you have it. I’m a hold for December. Obviously, we’re going to watch inflation. We’re going to watch job numbers. We’re going to watch what happens in the U.S. We’re going to watch the fuel. I’m thinking it’s going to be a hold, but again, we will see.

Dan Ahlstrand
There you have it, folks. He’s on the record as saying it’s a hold. Will it happen? I guess only time will tell. We’re going to take our first break here on this special live edition. You’re watching us on Facebook and on YouTube, and you’re also listening to us on our FM partners. We’ll be back in minutes.