Mortgage101 – Fixed Rates and Risk Tolerance | April 10, 2023

Clinton Wilkins and Todd Veinotte do a breakdown of fixed and variable rates. The two discuss the differences between fixed and variable, why you might choose one over the other, and the importance of factoring in your risk tolerance.  

Todd Veinotte 00:04
It is Mortgage 101 your guide to homeownership with Clinton Wilkins and myself, Todd Veinotte and Clinton tell me about fixed rates because this is something that the rates in the variable rate debate you and I have been having for quite a long time. But first, let’s talk fixed rates.

Fixed and Variable Rates

Clinton Wilkins 00:19
I mean, the great debate is continuing, Todd, honestly. And I think there’s even more pressure on what’s going on with the rates right now. We are in basically an inverse situation where the fixed rates are lower than where the variable are, that’s been going on now for a few months, okay. The longer we’re in the situation, more and more people will take a fixed rate just out of nature. It’s lower, I’ll take it. Lower doesn’t mean better, necessarily. A lot of clients that we’re talking to, we really have to get an idea about what their risk tolerance is. And their risk tolerance, you know, sometimes is high, the risk tolerance is sometimes low. And, you know, we really have to do an assessment based on, you know, where they’re at in their life on what the best kind of term and rate is.

Todd Veinotte 01:10
How do you determine that?

Clinton Wilkins 01:12
I think it’s tough, I think you have to look at their income, their assets and their credit, some people are forced to take a fixed rate right now, that might have been traditionally taking a variable, because they can’t qualify on the variable. Because it is harder now to qualify on a variable than it is on the fixed. Used to be the other way around.

Why take a variable rate?

Todd Veinotte 01:29
Why is that?

Clinton Wilkins 01:30
Because we have to qualify on a rate of 2% above the contracts. The stress test. So the fixed rates are lower, so it’s easier to qualify. So it doesn’t necessarily mean that everyone’s running and just taking five year fixed willy nilly. I will say they are the lowest. So taking a five year fixed is lower than a four, three, two or a one. The shorter terms are higher, five year is the lowest. Some people have to take a five year because the rate is lower than the shorter terms. They literally don’t have any other choice. This is all they can qualify for. And here you go. Okay, there’s not really a lot of discussion then. But for those borrowers that can qualify on any rate or term, then it really does open up that conversation. If clients are taking a fixed rate, sometimes I’ll offer a three year. If clients are comfortable. Some people just want to have a longer term just to know that they they know what they have. They’re okay. They understand it’s going to cost them some money. But they have the predictability, stability, payment certainty that it really is involved with a fixed rate. But three years are more popular now than they probably ever hap pen. We’re going to be over the hump by then. Yeah, the rate is high, but they can deal with it for a couple more years. No big deal. We know it’s going to be high all year. So three year is more popular. But the borrowers that are not sure what they’re doing, the borrowers that may want to break their mortgage early. The borrowers are that are savvy enough to be like, oh I’m going to convert it into a fixed when the rates go down again, those borrowers are taking a variable. To break the variable, three months interest. That’s very attractive, and that penalty will definitely be less than you breaking that fixed when the rates go down. Okay. So that’s important to know. You can also convert your variable into a fixed rate at any time with no penalty, for at least your remaining term. So maybe you ride your variable out for a year or two years, then you convert it down the road into a three year, four year or five year.

Todd Veinotte 03:20
So when you convert, you can then pick a five year term at that point?

Clinton Wilkins 03:40
You could. You can go up to a 10 year term with many lenders.

The long term pay off of a variable rate

Todd Veinotte 03:42
So the nice thing with the variable is you saying I’m gonna float around until that rate gets to where I wanted it that five year fixed, and then I’ll pull the trigger on the five year fixed.

Clinton Wilkins 03:48
100%.

Todd Veinotte 03:49
So if you don’t like where the fixed is right now, then take the variable, perhaps pay a little more if you can afford it with the stress test. And in three years, when that fixed is down, then you can pull the trigger then.

Clinton Wilkins 04:00
Maybe Todd the rates will be down in a year. I think that’s what we also need to remember. That’s where it’s really hard to know, we don’t have a crystal ball. I believe in a variable. I’m in a variable now. Is it costing me more money than if I have a fixed? Yes. But over five years, will it be lower? Yes. Variable is variable because it goes up and it goes down. But we have a very short term memory. And I was even looking back at, you know, I’ve been doing this 17 years. I remember when I started in 2006, fresh out of university. I was doing mortgages on a five year fixed at six and a quarter. And the variable was somewhere around 5.95. Because people were getting like prime minus whatever. And then doesn’t the prime rate go down to 2.25%? And I remember I had mortgages, brothers, I had one in a fixed rate and one was in the variable. The variable I think had gone down for them to like 1.35%. And like we still talk about it today. One was that six and a quarter, they wanted to do the conservative method. Another one took a slightly lower variable, riskier, but that it paid off. Right now, is the variable paying off? No. But will it over the period of your term? Likely yes. But again, we don’t know what’s going on with the world. Did we think there was going to be a pandemic? Did we think there was going to be, you know, what was going on going on in Russia and Ukraine? And do we think inflation was going to be a runaway train? I don’t know. We didn’t think that. What’s interesting, we touched on it earlier on our show, what’s going on in the US? Is that going to bring those bond yields down? Is it going to help with inflation? Is it going to provide that much uncertainty in the marketplace? That the cost of borrowing is just going to come down? It might. It ‘s too early for us to know. But obviously, we’re gonna continue watching this every day, like we’re gonna report this will be on with you on you know, on on the radio, we’ll talk about it. It’s really interesting.

Always consider your risk tolerance

Clinton Wilkins 06:05
And I think everybody’s situation is different. Everybody’s risk tolerance is different. And that’s why I think us asking these questions, very, very important. And I don’t sit in people’s household. So you need to know what your finances look like, you need to know your income and your credit and your assets. And can you weather the storm? In many cases, people can. And we’ve actually called every single client that we’ve had in a in a variable rate, we’ve been doing calls for two months, basically now. And I’ve been doing a lot of check ins, how are people doing? Some people are choosing to do transactions to refinance, do longer amortization. And some of them are choosing to do another variable. Some are choosing to convert into a fixed in terms of a transfer or moving them from lender to lender. And many customers that are really in these deep discounts, like prime minus 75, 100, 105, below prime or 110. Sometimes there’s even lower rates out there. They’re choosing to weather the storm, because you’re like, Clinton why would I convert into a fix at something, you know, 50,75 basis points lower than what I have now? That’s foolish. And walk away from my great, great discount, I’m going to ride it out.

Todd Veinotte 07:09
So if somebody is in the midst of a variable that they can, they can go to a fixed and renew that to a five, there’s no, there’s no need for credit checks or any of that.

Clinton Wilkins 07:18
As long as you’re with your existing lender, you can just do a conversion rate, but you need to take a minimum of your remaining term, or longer. That’s the kicker. And, you know, typically, when lenders do a conversion, they’re probably not offering you the biggest discount ever. Because you’re not new anymore. Yeah, they’re probably going to give you something closer to that posted rate. So you need to be very educated and savvy to do a conversion. Don’t race in and just be like, yes I’ll take whatever you have. This is going up. Some people did it. And I am fearing in a year or so they’re probably going to be unhappy that they took that five year fixed.

Todd Veinotte 07:57
Yeah, absolutely. Absolutely.

Clinton Wilkins 07:58
You know, when you’re in a contract, it is what it is.

Todd Veinotte 08:01
So there’s so much to know, here. I mean, people want to know more about what you’re doing, or they want to watch some more of us through your social media platforms or whatever it might be direct thing, direct everybody to all things Clinton Wilkins, and where they can find more of this kind of content.

Clinton Wilkins 08:16
Yeah, check us out online at teamclinton.ca/radio. It is the resource. We have lots of great content on our website, links to all our social media. We even have a TikTok, Todd and I are on their little clips of our show. Check us out. And we’d love to hear from you. Send us a note. If you have a question. You don’t even need to be a client send us a message and we’ll look into it. We’ll give you the advice. And you know, we love homeownership. We love helping people. We’d love giving advice and you know, thanks for listening.

Todd Veinotte 08:45
Absolutely. Clint Wilkins. Always a great pleasure my friend. Thank you so much.

Clinton Wilkins 08:48
Thanks for having me Todd.

Todd Veinotte 08:49
That is Clinton Wilkins. I’m Todd Veinotte, Mortgage 101, your guide to homeownership.

Clinton Wilkins 09:02
If you’ve liked what you’ve heard, and you want to learn more, feel free to visit us online at Tim clinton.ca