Fixed or variable mortgages in a time of interest hikes

Tracy Head • Oct 24, 2022

Last weekend I attended the mortgage professionals conference in Vancouver. My goal was to take in as many professional development sessions as possible because I’m finding we are moving forward in a very strange interest rate environment.

Ironically, and I never thought I’d ever say this, the session I got the most from (and arguably enjoyed the most) was the presentation by Benjamin Tal. Tal is the managing director and deputy chief economist at CIBC Capital Markets Inc.


He spoke about his thoughts on our current rate environment, the forces driving the Bank of Canada’s economic policies, and where he felt rates will go.


He also spoke about the unprecedented rate hikes we’ve seen this year. The Bank of Canada is trying desperately to curb inflation and he thought the bank has gone too far and has overreached with the rate hikes this year.


I am a fan of variable rate mortgages. One of the key factors that influences this is the cost of breaking your mortgage early. If you need to pay your mortgage in full and it doesn’t make sense (or doesn’t work) to port your current mortgage, the maximum penalty you will be charged is three months’ interest.


With a fixed mortgage, the penalty to break your mortgage is normally the greater of either the interest rate differential (IRD) or three months’ interest. Investopedia.ca shows how an IRD penalty is calculated:


“An IRD weighs the contrast in interest rates between two similar interest-bearing assets. Most often it is the difference between two interest rates.”


This type of penalty can be substantial. I’m currently working with a client who is selling a luxury property whose current mortgage is up for renewal. It is a sizeable mortgage and he is understandably concerned about the volatility of mortgage interest rates right now.


I did the math for him. Had he locked into a five-year fixed-rate mortgage, based on where rates are now and the balance of his mortgage, his penalty was in the range of $32,000. The variable rate penalty, again based on today’s balance and rate, would be around $6,000. So for this particular client who is absolutely going to be selling his home in the next year the potential increase in payment due to rising rates was a far more palatable option than a penalty in the $32,000 range.


All this aside, for many Canadians in variable mortgages the incredible rate hikes we’ve seen this year make a massive dent in their monthly budget. It’s really tempting to think about locking into a fixed rate product for the stability of the payment.


One consideration is how you will feel if you lock into a rate in the mid to high five per cent range when rates start to move down again. Will you sleep better at night knowing you have the security of a fixed payment? Are you losing sleep thinking about where rates are going?


I recommend you think about why you chose variable in the first place. You likely enjoyed really low rates for the first part of your term and will very likely enjoy lower rates towards the end of your term as rates start to trend down again.


I guess I should have started with that. Tal’s take is that we are in for another significant rate hike very soon but he feels rates will stabilize next year and start trending down again towards the end of next year or early 2024.


One option is splitting the difference. There are lenders who offer true variable mortgages with a static payment. This means that regardless of where rates move your payment stays the same. I should say, it stays the same until the increase in rate means you aren’t paying enough to cover the interest due which in turn will affect your amortization.


You would have to pay a three-month interest penalty to break your current mortgage to switch to a lender that offers a static payment. Most lenders will allow you to capitalize up to $3,000 of your penalty into your new mortgage (more if you do a refinance instead of a straight switch, providing you have enough equity for this to work).


Going this route you will still enjoy the benefit of a variable rate mortgage once rates start moving down again, without worrying about potential penalties if you have to pay out your mortgage unexpectedly.


If you’d like to chat about this, and see if it’s a fit for you, I am happy to do a mortgage check-up and offer some insight.

Tracy Head

Mortgage Broker

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Read your mortgage paperwork.

By Tracy Head • 03 May, 2024
Sharing this situation as a reminder of the importance of reading the fine print. I have been working on a refinance at renewal for clients in northern BC. They had tried to sell their home but their acreage is unique so they did not have any offers. Their home sat on the market for over a year and their mortgage was coming up for renewal. In the meantime life happened. They were at limit on multiple credit cards and credit limits and were stretched pretty thin. Work slowed for a bit so his income was down and they had a new baby so she was on maternity leave. They did have a significant amount of equity in their home so the plan was made to consolidate their debt to improve cash flow for the short term. We got an approval with a great rate. So far, so good. The approval stipulated that most of their credit cards and lines of credit would be closed. I had submitted the application specifying which ones were to be left open and which were to be closed. When the mortgage commitment came from the lender I double-checked the list and all was in order. The lender pulled the clients’ credit reports about two weeks before closing and came back with a few changes because they were now over limit on two more cards. The clients went to the lawyers and learned that the new lender wanted an additional credit card closed. This particular card was one they used for rewards points so they were not willing to close that specific card. They discovered this change when they were signing with the lawyer two days prior to their scheduled closing date. I became aware of this the morning their mortgage should have finalized. Their lawyer had told them it wasn’t an issue and that she would sort it out, but the lender was unwilling to compromise on this. The clients called me and were very frustrated. After several calls back and forth with the lender and the client we were able to reconfigure their file a bit so that card stayed open and another credit line was closed. So where does reading your mortgage paperwork come in? Most people thing that once they sign their original documents from their mortgage person that their financing is set in stone. In point of fact, there is always fine print that includes something to say that any material change to the clients’ financial situation may cause their financing to be altered or cancelled. A wise broker I know shared a list of Ten Mortgage Commandments with me in my early days. It laid out ten things you should never do between the time your mortgage is approved and the time it finalizes. It included things like you should not change jobs, buy a new vehicle, co-sign for any loans, spend your down payment, go over limit on your credit cards, etc. At the time I remember thinking to myself that the list was so condescending that I would never share it with clients. After many years and interesting scenarios as a broker I go over this list with almost every client. If you think no one would do those things I can assure you I’ve seen it happen. In this situation we were able to sort things out and their mortgage funded the next day. If you run into something similar at the last minute, loop your mortgage person in. They will likely have no idea that things are happening behind the scenes and they are in the best position to help you navigate through it. Our goal is to help you have a smooth experience so we are here all the way through the process. Part of my practice is to connect with my clients’ legal representatives so that they have my contact information in case anything like this pops up last minute. Clients often don’t know that they can reach out for help, and the lawyers may not think to ask. Should something like this happen to you at closing time, take a deep breath and reach out to your mortgage person. It may be very simple to solve when the right people are helping.

Procrastination

By Tracy Head • 19 Apr, 2024
This morning I was up with the birds (literally) and really wanted to sleep a bit longer. I decided to listen to a podcast rather than get up. The podcast, ironically, was about procrastination.  Her general message was that procrastinating often makes us feel bad. There are things we want to accomplish or feel we should do but we choose the immediate gratification / dopamine hit of time in front of the TV or mindless scrolling (or more time in bed) rather than the satisfaction that comes with achieving our larger goals and dreams. She talked about procrastinating with both our actions and making decisions. The irony that I was listening to the podcast rather than getting up and tackling my day was not lost on me. There were a few comments the podcaster made that struck home. Making a decision, any decision, is better than no decision. Human nature (for many of us) is that when facing a tough decision we freeze. We over-analyze the “what-ifs” and potential outcomes. We worry about what others may think of our choices. We may not even know what our options are. While procrastinating opportunities are lost or we dig ourselves in a bit deeper. The last year in particular has been challenging with higher interest rates and a steadily increasing cost of living. Many families are struggling to cover their bills and put food on the table. I’ve written columns before about how if you have equity in your home it might be wise to consider a consolidation of your consumer debt to free up cash flow. Making lifestyle changes can be easier said than done. I believe that staying the course and getting your mortgage paid off as soon as possible is always the best plan, but there comes a time when you also need to look at how your finances are affecting your physical and mental health. When we get behind with our bills or are teetering on the edge of not being able to cover everything this month we are also concerned about what people might think. We are worried about a call from our creditors asking for a payment. We project a certain lifestyle and feel the pressure to maintain this even though we can’t actually afford it right now. We lose sleep at night thinking about the “what-ifs”. If you are in this situation and have equity in your home, I encourage you to take action to explore your options sooner rather than later. I have worked with clients who have never missed a payment ever but their credit scores were in the 500 range (not good) because they are over-extended and maxed out on multiple loans, credit cards and / or credit lines. Had they reached out sooner we would have had more options to help them with a fresh start. This doesn’t mean we can’t find options, but there are certainly more available when credit scores are higher. As a rule I don’t get into the discussion of why you would work with a mortgage broker versus a bank but this is one of those times. I do place many of my clients with chartered banks when that is the right fit. When you approach your bank your situation might not be a fit for their lending guidelines. They may tell you they are not able to help you and that you will have to sell your home or look at a consumer proposal or bankruptcy. Selling your home may be the right answer, but before you jump to that place take a look at other options. Pick up the phone. Don’t procrastinate. If you are working with a mortgage broker they are able to explore multiple lenders and programs to help you try to find a solution to put you on the right track sooner rather than later.
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