Episode 59: Variable Rate or Fixed Rate? Which Option Is Your Best Investment In The Canadian Housing Market?
The big question on the mind of many Canadian homeowners minds these days revolves around interest rates. With the Bank of Canada’s overnight interest rate popping significantly over the last two years, homeowners with a mortgage are wondering what is their next move.
While those whose fixed interest rate mortgage might be coming up for renewal over the next 6-18 months might be wondering what their next move is, those who took on a variable rate mortgage over the past few years are wondering what they should do now.
- Should you lock-in a variable rate mortgage or a fixed rate now, later this year, or never?
- How and why interest rates have spiked so high, so fast comparatively to the past and where might we be going next?
- And how can you select the best mortgage terms for your personality and financial situation?
- A Timeline of Bank of Canada Rate Hikes [BNN Bloomberg]
- The topic of this episode was originally covered on our social media channels on Facebook, LinkedIn, Instagram, and Twitter.
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The big question on the mind of many Canadian homeowners with a variable rate mortgage is…
…should I lock-in my variable rate mortgage?
While every situation is different, the most simple answer without any other context would be “no.”
<Sorry to those who already did…>
The damage has already been done. Rates are high and the Bank of Canada (along with their boss, the U.S. Federal Reserve) are in a rate hold pattern with the aggressive spike up in interest rates that first began in early 2022.
The goal for these rate hikes was to stamp out inflation that had been very high for some time throughout the pandemic.
Although the last Consumer Price Index (CPI) numbers came in higher than anticipated in the U.S. this past week, economists still predict that rates will stay elevated in the short term before beginning cuts as early as the 2nd or 3rd quarter of this year.
While you may stand to save interest in the short term by locking in your variable rate mortgage into say a 5 year fixed, the data and probability suggests that you may soon find yourself paying more on the fixed than your current variable rate.
The Bad News…
The bad news is that any mortgage professional be it from the “Big Banks” or independent brokers who were promoting the use of a variable rate term while interest rates were at historical lows – with the exception of very specific cases such as a short term need – was doing you a disservice. The small savings you were receiving over a fixed rate has now turned into a big loss for many.
For those who bought a home, renewed, or refinanced with a variable rate mortgage in 2020-2022, your time to lock-in to a fixed rate has likely passed.
The Good News…
It is very likely that the worst is here and that relief is coming your way soon.
For those whose mortgage is up for renewal during 2024, exploring the option of a variable mortgage may be the right move from a probability standpoint. However, locking in to a fixed rate may be what you want and need to sleep better at night.
If possible, you might consider shorter terms, however you will be paying a higher rate to do so.
What are the terms of your mortgage currently and when are you up for renewal?
What are your plans based on what you knew before reading this post and what has changed now that you’re at the bottom?
See the comments for some helpful links to learn more about interest rate projections, CPI numbers, and who you might connect with to discuss your mortgage details in order to craft your plan.
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00:00:00:05 – 00:00:20:00
The big question on the mind of many Canadian homeowners these days revolves around interest rates. With the Bank of Canada’s overnight interest rate popping significantly over the last two years, homeowners with a mortgage are wondering what is their next move? Well, those.
00:00:20:01 – 00:00:35:03
Whose fixed interest rate mortgage might be coming up for renewal over the next 6 to 8 months. Those might be wondering what their next move is. And those who took on a variable rate mortgage over the past few years are wondering, hey, what should we do now?
00:00:35:05 – 00:00:56:15
So, my friend, stick around because we’re going to be diving into this idea around, locking in a variable rate mortgage. Should I be doing that right now? Locking into a fixed rate. Should I do it later this year or should I never do it? And how and why interest rates have spiked so high. And this is in comparison to the past few years anyway.
00:00:56:15 – 00:01:12:19
And where might we be going next? What will happen to the housing market given our current interest rate situation? And how can you select the best mortgage terms for your personality and your financial situation?
00:01:12:24 – 00:01:26:00
All right. Let’s go.
00:01:26:02 – 00:01:45:16
Welcome to the Canadian Wealth Secrets podcast with Kyle Pearce, Jon Orr, where we’re helping business owners and entrepreneurs to grow their wealth into a legacy that last generations through hidden investment and tax secrets. Your financial advisors won’t believe our true.
00:01:45:18 – 00:02:08:07
All right, All right, everyone. In this episode, like what Kyle and I said in the introduction just a moment ago, we’re talking about what’s on many people’s minds at the time of this recording bank. Ken is set to announce whether interest rates are going to increase, decrease or stay the same or no increase or decrease. And people are wondering, hey, what should I do?
00:02:08:08 – 00:02:27:13
What’s going to happen? Are we going to see rate cuts this year? We’re going to see rate cuts next year. Are we going to. Is inflation stagnant? Is it not? There are questions that are on everyone’s minds today. We want to talk about those questions, but also specifically talk about whether we should be locking in a fixed rate mortgage or should we go going with variable rate measures.
00:02:27:15 – 00:02:39:10
If I did one or the other before, what should I do now? Should I flip flop? Should I change? Should I stick with what I was doing in the past? We want to talk about all of that, possibly probably also some mindset around all of that, too.
00:02:39:12 – 00:02:59:21
I love it. I love it there, John. And before we do, we should probably talk a little bit about how did we get here. For some people. I’ll be honest, I watched the markets. I watched the stock market, I’m watching the S&P, SPACs, I’m watching the Russell 2000. I’m looking at the VIX, which is volatility indicator. I’m looking at the crypto market.
00:02:59:21 – 00:03:30:11
Whether I’m in or out of those markets, I like to keep a pulse as to what’s going on. And I’ll be honest, when we were preparing for this episode, I was a little bit, I guess, shocked to notice that we are almost at two years since the Bank of Canada and the Federal Reserve Bank of Canada typically is kind of following behind the Federal Reserve and what they do in the U.S. But since they had their first interest rate hike, that was back in March of 2022.
00:03:30:15 – 00:03:58:02
We are recording this near the end of January 2024. So we are almost two years into this. And I’ll be honest and say, like I felt like interest rates just started rising. That’s what it felt like to me. I don’t know about you listening, but it seems like we are well into this and it’s almost like it’s now when the typical housing market homeowners, your typical homeowners, are starting to recognize the impact of these rate hikes.
00:03:58:02 – 00:04:35:01
And I’m going to guess when they were talking in 2021 fall or 2021, they started they call it hawkish. The Fed and the Bank of Canada started getting hawkish, which means they’re starting to get a little bit more aggressive or leaning towards this idea that rates may be going up. And the markets then started peaking. So the crypto market, it was end of November 2021 when Bitcoin had its last all time high and then it started coming down and then a couple months later, just into the new year of 2022, the S&P started its decline as well.
00:04:35:01 – 00:05:01:23
And then March 2nd, 2022 is when we started seeing the first cut. So the market kind of was front running these hikes, I should say. So the market was in their minds going, okay, as interest rates go up, we know what happens. People start to tighten their belts on their spending. Right. And if we start tightening their belts, they have to start selling investments and all of those things start to happen.
00:05:01:23 – 00:05:33:06
So this is all planned. This is why interest rates go up and down. And basically we’ve been on this two year journey of interest rates rising and really for a very specific goal to stamp out inflation. Right. So we had lots of money printing, as we’ve talked about on previous episodes throughout COVID. At the time, I think everyone was appreciative of it, but the average person is not really thinking of the impacts on the economy and what has to happen later.
00:05:33:12 – 00:05:57:24
So when we look back on it, we think, Wow, we’re stuck in our homes. We didn’t need as much money for survival as you do when you’re not locked down, and so on and so forth. It almost seems counterintuitive, right, that we printed so much money during that time to keep an economy going that wasn’t really going. And what that did is sent inflation through the roof.
00:05:58:05 – 00:06:19:20
So here we are. I don’t know if folks are aware of this, but when we look at the overnight rate, this is the rate that the the Bank of Canada gives money to banks and that banks pass back and forth to each other, The overnight rate was at 25 basis points at 0.25%. Before that first hike in March 2022.
00:06:20:01 – 00:06:37:09
And we are now sitting at 5%. Now, John, you and I are both math teachers, right? So we were math teachers and we love math. That’s a tax increase in the interest rate. And yet 5% isn’t necessarily the all time high that we’ve ever experienced either.
00:06:37:11 – 00:06:59:06
No. And I know mortgage brokers back then, they would argue in previous years that we should always go with a variable rate that’s only thinking about it back then. It’s kind of an interesting thing to kind of help people understand because most mortgage brokers would say like, you should lock always in at variable because you’re going to eventually save money over time.
00:06:59:08 – 00:07:27:22
And what I heard from mortgage brokers back then or mortgage professionals, is that even if you do lock in your variable rate mortgage at the all time lows, at the all time lows, people would say like, I’ve never seen this constant increase over time to get to these all time high. It’s like, Hey, the Bank of Canada is only going to increase at 25 basis points per time and they meet only so many times a year.
00:07:27:22 – 00:07:46:15
So by the time that gets up there, you will have saved a bunch of money in the meantime. But while not locking rates in at all time lows, sometimes seems like, hey, why wouldn’t we lock in for at least a few years and not all the time? Because what happened, right, is what happened is everyone saying like they’re not going to increase by more than 25 basis points.
00:07:46:15 – 00:08:03:11
They’re not going to increase every time they meet, Hey, what happened? They did. And there was 50 basis points. There’s 100 basis point increases over those two years and now we’re at 5%. And which is what? This is not a doubling. This is not a tripling. This is 20 times greater than what we were before. Yeah.
00:08:03:11 – 00:08:16:05
And I just want to clarify one thing, because you were talking about all time lows and yeah, absolutely used all time high in the discussion there. But I want to make sure it’s clear that we are not at an all time high. We’re at a 20 year.
00:08:16:05 – 00:08:17:22
High, right? Yeah, that’s, that’s it.
00:08:17:24 – 00:08:37:02
So we are in your mind, right. And I’ve only owned a home, my own personal residence. Right. For I think it’s about 20 years and up on the screen for those who are watching on YouTube or if you see this in a social media clip, you’ll see that since the early eighties, basically in the eighties, we were up like at about 20%.
00:08:37:02 – 00:08:58:06
What’s the overnight rate? Right. So people have heard about that and nasty things have happened in the eighties. But you can see this chart and, you know, being a numbers guy, also looking at technical analysis and the stock market and so forth, The same is true here with interest rates. You could see this steady decline over time. Now, there were these blips up and down right in the nineties.
00:08:58:06 – 00:09:21:13
There was a blip up. That’s because inflation, they had some issues with inflation again. So they popped it up and then ooh, early nineties weren’t so hot for a lot of people. Right. And it just gradually came all the way down until the low in 2010 they start bumping the economy up. Now. Why did they lower rates starting in 2008 to 2010 while housing market in the U.S. right.
00:09:21:15 – 00:09:40:19
Everything. The economy was upside down. The financial crisis was going on. So what did they do? They lowered the rates all the way down. I believe it was about at a quarter percent as well. So it’s kind of like those were the are too low all time lows. And then you see after 2010, they tried to bring it up for a little while and they did for a while.
00:09:40:19 – 00:09:59:14
They held it and then they bring it back down because the market got shaky right then they started bringing it up again in 17 and 2018. And then all of a sudden things started getting wonky before COVID. By the way, I don’t want to start getting everybody thinking about whether there is something going on in the background here.
00:09:59:14 – 00:10:24:21
But interestingly enough, they tried to keep the rate up a little bit as we entered into 2020, and then all of a sudden COVID happened and the economy was saved, right? So they bring down the interest rate to save the economy, to promote spending. And here we are, inflation pops. They called it transitory for quite a while. And in reality it wasn’t transitory.
00:10:24:21 – 00:10:44:07
It was very sticky, as they now call it, sticky inflation, and they need to stamp it out. So that is why the interest rate is where it is. But like you’re saying, John, when we get down to these lows, the question you have to ask yourself when it comes to variable rate mortgages is how much is my upside worth to me here?
00:10:44:13 – 00:11:04:10
Right? So when I look at this chart, if I’m a mortgage broker, if I’m a mortgage agent like you are, John, and I show a client this chart back in 2020, even 2021. And I say, What do you think chances are, do we go lower or do we go higher from here? We might stay the same, right? And then you can maybe save a little bit, right?
00:11:04:10 – 00:11:34:08
But not a ton. Are you willing to go for that in order to stay the same? Or do you think that there’s a chance that maybe things start to go up? Is it worth just having a little bit of that safety? And I think any mortgage broker agent that actually looks at the data back when rates were at all time lows would have said, you know what, if you’re really, really, really, really, really want to go variable, then sure, of course I will do whatever you want.
00:11:34:08 – 00:11:58:18
You’re the client. However, if we want to look at it from a data perspective, it really didn’t make sense. Even if there was some savings provided. As many know, there’s often times it’s a variable, it’s a prime minus a certain number of basis points. So you’re saving some money there. But again, it’s like, what about the upside risk here on interest rates?
00:11:58:20 – 00:12:22:09
And I think where we’re at now is thinking about that, whether we were deciding to lock in back then. And if you did, you probably are putting yourself on the back. And if you did go variable, you’re at this point, we’ll actually lock it down. Should I lock it now? Should I lock it now? And now it’s like, well, a few years down the road, it’s like if you lock in now, you’re probably looking at maybe you missed the boat.
00:12:22:11 – 00:12:42:07
We’ve got reports that the rate is going to maintain and eventually in the next year, within the next little bit, it’s possible we might be seeing some decreases. And if we did see some decreases, we’ve got a little bit of decrease. And again, we’ll probably aren’t going to be jumping down with all of a sudden we’re going to do what we did at Cove it and we’re just going to drop a bunch.
00:12:42:09 – 00:13:14:17
It’s going to be those 25% basis point declines. And if we do, you’re seeing some of that to go down. So like, for example, if we have a 25% basis point reduction on that, say overnight rates or overnight rates like 4.75%, prime is going to be about 6.95% for every 100 K of mortgage, you’re going to have a $16 decrease in your mortgage payment for every 100 K of mortgage you have of all of a sudden we’re go down 50 basis points for every hundred K, you’re going to throw two bucks down.
00:13:14:19 – 00:13:27:19
And if you go down 75% basis points and you’re going to be dropping 48 bucks in your payments. So give you the perspective on what that drop is and whether you should go variable or whether you should go fix. Now, because this is the question right now, which one should we do right now?
00:13:27:22 – 00:13:51:22
Yeah, and here’s the hard part, too. And I would argue, John is a great guy to take your specific scenario. So if you’re curious reach out to us Canadian wealth secrets dot com forward slash discovery get on a call with John so he can look at your very specific scenario because we’re speaking in generalities here assuming that somebody took a variable rate mortgage at the all time low.
00:13:51:24 – 00:14:13:06
I would argue that one’s a pretty simple one. If you took a variable rate mortgage at an all time low and we’re now sitting up at 5%, the question then becomes is like, how is your stomach? Are you able to sleep at night? Does it scare you? Even though the data is suggesting to us, probabilities suggests that we are going to hold tight for a little while and then probably see some cuts?
00:14:13:06 – 00:14:36:01
Now, what could interrupt that? Well, if inflation starts spiking up again, right. If it starts spiking up again, then it means we haven’t done the job. But up on the screen right now, you’ll see for those watching on YouTube, you’ll see there’s a red line that’s inflation and you’ll see the blue line, which is the policy rate. And you’ll notice that what typically happens is we raise rates to try to tame inflation.
00:14:36:01 – 00:15:03:10
You see that from 2017 to 2020. They did a good job of that. You’ll notice, though, that usually when the rate does get cut, oftentimes maybe not as aggressively as in 2020, but often times it will spike down hard because a lot of times the Fed and the Bank of Canada, they actually over do it right. They raise rates to a point and they hold them higher and then they actually break the back of the economy and then they have to fix it going the other way.
00:15:03:10 – 00:15:25:06
So it’s like a bit of a ping pong. They’re like, woof, woof. So typically raising happens slower. You’ll see here it’s been very aggressive because inflation was so high. And then as soon as the rate got passed, the level of inflation they’re holding and what they just want to see is that that inflation rate continues on a downward trend, which again, economists suggest is going to happen.
00:15:25:12 – 00:15:48:10
However, if that spikes back up, they might have to hold longer or they might have to increase. But probability suggests we’re going to see decreases in the interest rate. So the question becomes, like you said, John, do I lock in? And I’m going to argue that, like you said, John, you’ve probably missed the boat. I say probably because you want to have a very, very specific look at your case to determine this.
00:15:48:12 – 00:16:15:21
But you probably missed the boat. And the question is, if you still if you can’t stomach the idea of the variable because you’ve just seen it going up and up and up and up for the past two years, what you might want to do is look at locking in to say, a one year, maybe a two year fixed, which means you’re probably not going to get that savings that you might see comparing your variable, your high variable to, say, a five year fixed.
00:16:15:21 – 00:16:49:02
But here’s what happens if you lock into a five year fixed now and we start seeing cuts happening in say, Q two. Now economists are saying more like Q three of this year. So later in 2024, we are less than a year away from that. And if you start seeing cuts happening there, you might find yourself six, 12 months from now watching the rates falling and watching where you’re variable rate would have gone and end up seeing your variable rate mortgage being lower than what you’re paying in this new five year fixed rate.
00:16:49:02 – 00:17:13:05
So this is typical. This is human nature, right? What happens is it’s like the stock market people sell when it’s low, they buy when it’s high, and then they’re like, I’m not going to do that again. And then the market goes down again and then they sell again and then they buy. It’s the same thing here. You’ve made maybe a choice that maybe you wish you didn’t, but you don’t want to overcompensate and then end up putting yourself in a worse position.
00:17:13:11 – 00:17:33:00
So again, really, I think one of the key pieces here is definitely talking to if you have a mortgage broker you work with or a banker that you trust, definitely go in there, have that conversation or John is obviously willing and available for you. Those who are listening, who want to have a chat with him. John’s licensed here in the province of Ontario.
00:17:33:01 – 00:17:44:06
However, if you’re in another province, we’re more than happy to provide you. We’re just kind of an oversight of what might make sense for you so that you can head off to whatever professional you feel comfortable going to.
00:17:44:08 – 00:18:02:09
Yeah, it always comes down to where that comfort is. Where is your mind? Like, what are you going to be happy with? What are you going to able to sleep at night with? That’s a really important factor when you’re making this decision, is that sometimes you might be saying like, I’m okay with missing out on the fact that the rate will go lower.
00:18:02:09 – 00:18:22:23
Because when I did my calculations or when I did my analysis, I’ve looked at the studies and that’s what we do when we go through that with our clients is we look at the scenarios and if we’re looking at renewals at this rate or we’re looking at renewals at that rate, can we make this work? And if we can make this work for you and your budget and you’re happy with it, then that helps you sleep at night.
00:18:22:23 – 00:18:36:19
You might be like, I don’t have to worry about it for the next three years, and some of you aren’t going to look at the data. They’re not going to look at the rates at that point because you’re like, I was happy with it on that day. We made sure worked. And then when that three years, those four years come up, we can talk about it then.
00:18:36:19 – 00:18:52:23
Because if you go into a variable rate right now and you grappling with the fact that maybe you never know, right, the you never know what could happen, then you want to be able to sleep at night, right? You want to be able to be in make sure that you can ensure to pay your mortgage on time when you need to.
00:18:52:23 – 00:19:10:05
So it is a personal preference. It’s also a personal timeline. What is your timeline on how long you’re going to want to keep that mortgage? 60% of Canadians break their mortgage within the first three years. It’s a fact that we break them for different reasons. And and sometimes we got think about that down the line in our future.
00:19:10:05 – 00:19:31:01
So it’s a very personal and situational situation. So that’s why it’s important to talk with somebody about it. It’s important to kind of figure out the scenario on your own situation. It’s not a blanket, Hey, we should always just go variable. We should always just go fixed. In this case. Hey, the data suggests variables are really good choice right now, but talk with someone about your particular situation.
00:19:31:03 – 00:19:49:11
I love it. I love it. And what popped into my mind, as well as some people that have say, line of credit, a home equity line of credit. Right. Your home equity line of credit has jumped quite significantly as well. A lot of people are paying around 7.2%, if I would say if they’re lucky, on a home equity line of credit, some people are above 8%.
00:19:49:13 – 00:20:08:03
So if you have a big balance on your home equity line and then maybe you even have a fixed portion of your mortgage, that’s at a really low rate, if this is something that is on your mind, reaching out to someone you trust is important so that they can run the scenario for you and allow whatever makes sense for you dictate where to go next.
00:20:08:03 – 00:20:30:06
Now, none of that, none of the numbers should overtake your personal personality preference, your comfort. Some people just want to know exactly what’s going to happen between now and a certain point in time. So you really have to factor that in as well. It’s not just a numbers game. Sometimes it really is about what’s going to help you sleep at night.
00:20:30:06 – 00:20:59:06
As John mentioned. So that is a really important piece for me. I want to share a big takeaway here on this particular scenario, something that I’m hearing from what you just said, John, and some of the things that we discussed is that really every scenario is different. Every person is different. And really what you want to make sure that you’re doing is that if you are looking to try to get we’ll call it save the most money, have the most upside, which I think as humans we all want to do.
00:20:59:08 – 00:21:32:09
You just need to make sure that the person you’re working with is open enough and knows enough to be able to show you what your risk is. Right? So showing what might happen if blank. So that should be happening and that should involve historical rates. That should involve a worst case scenario. It should involve all those things so that at least when you make your choice that you know what it is that you’re signing up for, There is never a one right way to do it because everyone is different.
00:21:32:09 – 00:21:55:08
So I think that for me is the big takeaway. I hope you take folks out when you go into your next meeting with your bank, with your mortgage agent, or maybe reaching out to John. If you’re here in Ontario or just looking for a second opinion from another province, you want to make sure that when you walk away, you know what the options are and you feel comfortable about the option you’re taking.
00:21:55:08 – 00:21:58:18
It’s not always simply a numbers game at the end.
00:21:58:21 – 00:22:18:09
Great takeaway. Caroline, I think, echoes the big things we want to talk about in this particular episode. So we want to thank you for listening here on the Canadian Well Secrets podcast. And if you have not yet done so already, hit the subscribe button so that you can get notified. You can see the episodes as we put one out each Wednesday morning, that’s when we’re putting episodes out.
00:22:18:09 – 00:22:38:17
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00:22:38:19 – 00:23:13:21
I love it, my friends. Hey, show notes, links to resources, transcripts and all kinds of other goodies can be found over on the website. Canadian Wealth Secrets dot com. This was episode 59 if you’re searching for it. But again over on the website Canadian Wealth secrets dot com. All right Canadian wealth secrets Seekers class dismissed.
00:23:13:23 – 00:23:24:21
Just as a reminder here folks, the content you heard today is for informational purposes only, you should not go through any such information or other material here as legal tax, investment, financial or other advice.
00:23:24:23 – 00:23:43:24
Jon Orr is a mortgage agent with bricks. Mortgage License m23006803. Kyle Pearce is a licensed life and accident sickness, insurance agent and wealth architect with the Pan Corp. team, which includes corporate advisors and pan financial.
Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.
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