Variable to Fixed: Simcoe County mortgage brokers advice in an unstable market

Barrie: Variable vs fixed mortgage rates Mortgage brokers in Simcoe County offer expert advise on variable versus fixed mortgage rates.

More than two million Canadians will renew their mortgages over the next year-and-a-half. CTV News asked more than 50 mortgage brokers across Canada how to get the best mortgage deal. This is what we found.

Mortgage brokers across Simcoe County have shifted their advice, recommending fixed versus variable mortgage rates, as high prices rival those in the Greater Toronto Area, and the region experiences unprecedented growth.

"We always used to go with a variable mortgage," said Jason McKague, with McKague Mortgages.

Steph Quenneville, with Mortgage Sense, said that in light of the current market conditions, qualifying for a five-year fixed mortgage might be the best option.

"I think there's a lot of instability in the market," noted the Barrie-based broker, adding that market instability is causing variable rates to exceed fixed-term mortgage rates in the past two years.

"I think normally variable outperforms fixed, but, in my opinion, it's not right now," Quenneville said.

Quenneville and fellow Barrie-based broker McKague encourage clients up for renewal to consider switching their mortgage from variable to fixed.

"Some lenders actually make it very easy," McKague said. "You can literally just click away and all of a sudden be flipped over to a fixed."

Kevin King, with CENTUM Financial Services LP King Mortgages, also recommends fixed mortgages over variable in the current housing landscape, despite rumours of a quarter-point decrease coming Wednesday.

"I don't think it's going to mean a lot, to be honest with you. I think people are sitting on the sidelines, hoping and waiting," said the Midland-based broker. "It would be really nice to see it come down because everybody does need some relief, but a quarter point is not going to drastically change things."

King and Mortgage Wellness broker Nick L'Ecuyer can offer flexibility to clients struggling to pay their mortgage, but if interest rates don't change significantly, L'Ecuyer hopes that policy does.

"Increase the maximum amortization back up to 40 years, and give clients an option to increase their payments when times get better. So providing lower payment through longer amortization in the face of higher interest rates," L'Ecuyer added.

For those needing to renew their mortgage, the advice from all four brokers is to shop around.

Brokers across Simcoe County will be keeping a close eye on Wednesday morning's interest rates announcement. But even with the anticipated slight change in interest rates, the brokers we spoke with emphasized that the lack of available affordable units remains the main barrier to purchasing a home in the region.

Responses to CTV News' Mortgage Broker Questionnaire

Broker Name:  Nick L'Ecuyer

Broker Company:  Mortgage Wellness

Note:  All questions are based on a typical Canadian household renewing a mortgage.

Question #1:  What is the best type of mortgage to have right now?

Five-year fixed rate at 4.99 per cent, though most consumers are choosing a shorter-term fixed rate, such as a three-year fixed rate, as rates are expected to decrease. Consumers want to take advantage of lower rates when they come. However, taking a shorter term will come with a slightly higher rate. For example, a three year fixed rate would currently be around 5.29 per cent. Many clients are asking about variable rates but most don't realize that they are still about 1.25 per cent higher than a fixed rate for a comparable term. Though borrowers want to take advantage of rate cuts as they happen with the Bank of Canada, there would have to be very quick, significant cuts for a variable rate to be worthwhile in today's market. For example, the first 1.25 per cent in cuts (which will likely take the better part of a year to achieve) will only bring a borrower to today's current fixed rate.

Question #2:  What is the best rate you can get right now?  (Specify rate and term length)

Most lenders are currently publishing one rate but offering a much lower rate to the best clients at the time of approval. We secured a 5-year fixed rate of 4.69 per cent for a client last week. 6.15 per cent, five-year variable.

Question #3: Should I get out of my variable mortgage if I have one?

In some cases, yes, but it should be part of a borrower’s overall plan. For example, do you plan to keep your home for five years? If not, why lock into a new five-year term just to get a fixed rate? A borrower would likely pay a penalty if they did this, which could negate any savings in rate. If a borrower plans to stay in a home and can manage the new payments and gets payment relief, then perhaps.

Question #4: Should I opt for a longer amortization period?

In almost every circumstance, a borrower will be paying more for their next mortgage versus the mortgage they currently have. In my experience, few clients can simply just manage the higher payment. For this reason, it is best for a client to consider consolidating debt and other payments into their mortgage and extending their amortization. This will give them one new lower, manageable payment. The key is to create an individual plan for the borrower that ensures they are financially comfortable and not stretched or stressed.

Question #5: Can I trust a bank for mortgage renewal advice?

In most cases, yes. Banks will often have specialists who only arrange mortgages. This is the best form of advice that a client can receive from a bank, rather than from a generalist type employee who may also focus on a variety of other financial products, like Visas, bank accounts and savings accounts. However, those bank employees can only offer their own products. In comparison, a Mortgage Broker is unbiased and specialized. They can offer products from a variety of lenders and offer much more specialized advice, given that their sole focus is mortgages. A consumer’s best financial advice for a mortgage will come from a Mortgage Broker.

Question #6: What piece of advice would you pass on to anyone looking to renew their mortgage?

Prepare early. Start having the conversation with a Mortgage Broker about a specialized individual plan that works for you and your family. You likely have equity in your home, and now may be the time to use it to your advantage to consolidate debts, lower your monthly output, and perhaps also increase your amortization. This way, you are prepared for higher interest rates and the inevitable higher payments that will come with higher rates.

Broker Name:  Jason McKague

Broker Company:  McKague Mortgages

Note:  All questions are based on a typical Canadian household renewing a mortgage.

Question #1:  What is the best type of mortgage to have right now?

In today's market, fixed provides a borrower with a lower rate and payment than a variable, which is what's more important to people today. That said, variable has historically been the best option if you look back, but unfortunately our government at this point is unpredictable. There are numerous economic indicators that we should have lower variable rates, but our government and BoC think that lowering the overnight rate will cause a housing frenzy again. The reality is that is not true. Variable rates are significantly higher than fixed rates today, and with the stress test, borrower's debt servicing ratios are more favourable if they go with a fixed rate mortgage and will qualify for a larger mortgage amount than going with variable. The government should lower the overnight rate to help those people who are in variable rate mortgages today. This will provide financial relief when everything is costing more for people.

Question #2:  What is the best rate you can get right now?  (Specify rate and term length)

This is a loaded question, everyone’s financial profile is different (down payment, credit scores, default insured or not) there are too many variables to just “market” the best rate without adding a dozen asterisks.

Question #3: Should I get out of my variable mortgage if I have one?

No, I think at this time, we have a lot of pressure on our BoC to lower rates, or at least I hope there is. A variable mortgage provides flexibility if one needs to break the mortgage as the penalty is usually a maximum of 3 months of interest. A fixed mortgage can have an interest rate differential calculation that can work out to be a significant penalty. My hope is we are nearing the end of the peak of higher variable rates.

Question #4: Should I opt for a longer amortization period?

Yes, depending on a household’s cash flow, if one is looking for some financial relief, than having a longer amortization will help with lowering their mortgage payment. Cash flow is king, most lenders will have prepayment privileges. If you see your spending a lot less than you are earning and your goal is to pay down your mortgage as fast as you can, then use those funds that have built up in your bank account and put a chunk down on your mortgage principal.

Question #5: Can I trust a bank for mortgage renewal advice?

Yes, but it’s important to have a mortgage broker review your terms and offers from your bank. Unfortunately, it seems people are willing to just check off a box at whatever options they are being provided from their bank without making a bit of extra effort for their own financial wellbeing to have a broker confirm if there are better rates available to them. If there was an opportunity to save yourself call it $10,000 in interest versus having to earn “after tax” $10,000 to pay for a higher rate mortgage, that seems like a no brainer to me.

Question #6: What piece of advice would you pass on to anyone looking to renew their mortgage?

All the banks and lenders are constantly readjusting their risk and appetite for mortgage volume. One bank will have a promotion one week and that will end the following week. One will approve a borrower when the next may not. It’s important to work on options.

Broker Name:  Kevin King

Broker Company:  CENTUM Financial Services LP King Mortgages

Note:  All questions are based on a typical Canadian household renewing a mortgage.

Question #1:  What is the best type of mortgage to have right now?

It's hard to call here without knowing more about the client and the situation, as everyone is different. Assuming it's just a family that is staying in home, I would say a fixed rate 3 to 5-year term.

Question #2:  What is the best rate you can get right now?  (Specify rate and term length)

Prime less 1.10% insured 5 year      4.79% insured or 5.05 Conventional both 5 year

Question #3: Should I get out of my variable mortgage if I have one?

This one is a tough call without knowing more about the actual situation. If you have a variable and are struggling with the payment and are concerned about it increasing, yes, you should go into a fixed as it will be cheaper.

Question #4: Should I opt for a longer amortization period?

I am recommending this to most clients at the moment. You can choose a longer amortization and increase the payment later on your own, effectively lowering your amortization. However, this allows you to change it back as your situation changes.

Question #5: Can I trust a bank for mortgage renewal advice?

Your bank is not looking out for you; its concern is profit. I have had many clients share their renewal options provided by their bank, and it's often the posted high rates, and many people just sign without trying to negotiate or shop around.

Question #6: What piece of advice would you pass on to anyone looking to renew their mortgage?

I have been advising clients to shop around and do what is right for them. Hopefully, we are at the end of the hikes, and we will see some rate relief in the next 12-18 months, and we can revisit things later. Everyone is trying to time the market perfectly, which is impossible to do. Historically, under 5 per cent is actually a great rate, and we may never see two to three per cent rates again or for a very long time. Locking in at five per cent or close for a three to five-year term is actually a great rate historically. Some clients with smaller mortgages and affordability are actually requesting variable rates again, with the hope that they are coming down again soon; also, not a terrible plan, but it's a bit more costly at the moment and a little riskier.A majority of Canadians will renew their mortgages over the next year-and-a-half. CTV News asked more than 50 mortgage brokers across Canada how to get the best mortgage deal. This is what we found.

Broker Name:  Steph Quenneville

Broker Company:  Mortgage Sense

Note:  All questions are based on a typical Canadian household renewing a mortgage.

Question #1:  What is the best type of mortgage to have right now?

Fixed rates are expected to stay steady. The longer the term the lower the rate due to the inverted yield curve, short-term money is still expensive. It really depends on your three to five-year plan, variable might be a better option if you are considering a change in the short term.

Question #2:  What is the best rate you can get right now?  (Specify rate and term length)

Rates are no longer easily defined as they were prior to Federal Bill B20. There are too many variables to provide an honest answer. There are components such as the loan compared to the property value (with four different rates per category), down payment amount, insured, insurable and uninsured. There may be slight downward trends in the variable rate, but it is not my opinion that any drop during the short term will not create the savings that would justify the choice as the rates drop over the next few years. A reasonable estimate of a good rate would be: Fixed : 5.49% uninsured / 4.99% insured, Variable up to Prime -1 %, Prime is 7.2%.

Question #3: Should I get out of my variable mortgage if I have one?

Depends on how much term is left or if you intend to move. In general, if you have more than three years left, you will likely save a lot of money by locking in your rate to the remaining fixed term.

Question #4: Should I opt for a longer amortization period?

To extend your amortization, you will need to requalify due to Bill B20, even at renewal. I believe it would be beneficial to many people, but if the qualifying was tight on purchase, you likely will not qualify to extend the amortization even if the payment will be cheaper than your renewal offering.

Question #5: Can I trust a bank for mortgage renewal advice?

Sure, but consumers need to understand that the bank employee will always act to the benefit of his/her employer and that they will, in general, act to the benefit of the employer.  Bonuses are paid to maximize the benefit to the bank, and strategy planning is not a priority in producing bank revenue. A broker has a significant interest in retaining the client, so it is a common best interest for the broker to do what is best to retain the client, as the client is the primary source of revenue.

Question #6: What piece of advice would you pass on to anyone looking to renew their mortgage?

Start early and spend more time looking at strategy options rather than rates. Consumers are too focused on rate and miss opportunities to better their lives by doing what is right for them rather than accepting that rate is the priority.