- Hey, it's Nolan Matthias from Mortgage 360,
and today we're talking variable-rate mortgages.
Because quite frankly, with everything that's going on
in the world, with this pandemic,
and with interest rates being at all time lows,
variable-rates are becoming more and more popular.
But it's important to understand what you need to look for
in a variable-rate lender,
and also what criteria you need to use
in order to determine whether to lock in.
And you might be surprised
at what the lock-in criteria that we suggest is going to be.
But, you're going to have to wait till the end of this video
in order to get that information,
and before we get into it, do me the favor:
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Okay, so there's three things that are really important
to understand when we're choosing a variable-rate mortgage.
The first is lender selection.
The second is how the actual lock-in process works,
and the third is the criteria that you should use in order
to determine whether it's the right time to lock in.
And that's the piece that's going to surprise you,
and also the piece that you have to wait
till the end of the video to see.
So, let's start first with lender selection,
because nobody wants to be the guy that gets caught
with a lender that won't let you move,
or that's going to charge you a massive payout penalty,
or who's going to, surprise!
Make you lock in at a super high rate.
So, the three things that we look at with lenders, are,
first of all, the set of rates that they are typically
using to allow clients to lock in.
And, it's different with different lenders.
You know, big bank typically has a higher lock-in rate
than a monoline lender has.
And, you know, we've seen two monoline lenders
be basically a half percent apart right now
on their lock-in rates,
and everything else in the product is pretty much identical.
So, how they select the rates that they're going to
allow you to lock in to, is important.
And, in the event that, over time,
they aren't being as competitive,
we also want to make sure that we have the ability
to switch to a different lender.
So, in other words, we want to avoid things like,
no refinance clauses and bonafide sale clauses.
Which are essentially the same things,
but one is a fancier term for the other.
And the reason we want to avoid those is because,
if our variable-rate provider isn't playing ball,
and giving us a really good lock-in rate,
we want to be able to take our mortgage
and take it to a different lender for a better rate,
even if we have to pay the penalty.
Because quite often, what we're finding is
when we're locking in, you can switch to a different lender,
pay a three-month interest penalty,
and still save more than what that penalty would cost.
So, it's important to be able to move the mortgage.
And the third thing we really look at, is that penalty.
Because there are lenders out there
that will offer super low variable-rates,
but they end up putting in flat fee penalties,
which basically make it super expensive to move,
and if it's super expensive to move, guess what?
They can pretty much make you pay whatever you want
when you go to fix your mortgage and lock in the rate.
So we want to avoid that sort of scenario,
and that's why lender selection is so important.
Now, let's talk about the actual process,
when we get to the point of locking in our mortgage.
Because, what doesn't happen is, you don't get to just
lock it in at the rate that you're paying
on that particular day.
In fact, what ends up happening,
is you have to pick a fixed rate term,
that's typically longer than the amount of time
you have remaining on your mortgage.
So, let's say you got a five-year variable,
and you are two years into it, you've got three years left
on that five-year variable.
If you want to lock in,
you've got to take a three-year fixed or longer.
Which is why it's so important to know
how they choose their lock-in rates, because
you're going to have to choose one of their fixed rates.
And, if your lender's fixed rate isn't competitive,
compared to what else is out there,
it's a good idea to actually go out and shop around.
And, most people don't realize this,
but when you're locking in, it's not just about
saying to my lender, "Okay, I'm ready to lock in."
You actually want to go through that whole mortgage process
again, and make sure that you search the entire market
to make sure that you can find the absolute best rate.
Now, the third thing, and the most important thing,
this is the criteria of how you should know
whether or not you should lock in your mortgage.
And this is really important.
And it's not what you think, because,
there was a study done in 2001 by a guy named
Mash Malefskya, of the Schulich School of Business,
where he compared fixed versus floating rates.
And most people think that, you know, variable-rates
are better off when interest rates are going down,
and they perform worse when interest rates are going up.
And that's not necessarily the case.
What the actual data tells us, is that whether or not
you win with the fixed or variable-rate mortgage,
is almost entirely based on the difference between the rates
when you get the mortgage.
Or, in this case, when you're choosing to lock in.
And what you always want to do,
is you always want to make sure
that you've got the lowest rate
that's available at the time.
So let's say that you've got a 3% variable-rate mortgage,
and the lock-in rate that you're being offered is 3.5%.
Well, you're half a percent lower than your lock-in rate,
so that's probably not a good idea to lock in.
But, if you can get a lock-in rate at 2.5%,
or maybe even 3%, depending on your risk tolerance,
then it may be a good choice to lock in.
So the key thing here is,
you only want to lock into a fixed-rate mortgage,
if the rate that you're getting is lower
than the variable-rate mortgage that you already have.
It's pretty simple, right?
You just, only want to lock in if you can get a lower rate.
Now, one thing I would caution is, if rates are going down,
and you can get a lower rate on a fixed rate
than a variable, you may want to just kind of ride it out
and see where rates go, because it could be a sign
that rates are going to get better and better and better,
and your variable could still end up outperforming
your fixed-rate mortgage.
The best advice I have is actually to consult
a mortgage professional, every time you're thinking about
making a change to your mortgage.
Because there's certain things that they may know,
they may see, there may be other products out there
that are available, that you may not be aware of;
or, quite frankly, the mortgage that you have
or the mortgage that you're thinking about locking into
may not be the best mortgage for you anymore.
So, it's important that every time you make a big change
to your mortgage, consult a mortgage professional,
and an independent one, somebody who isn't tied to
a specific bank or a specific lender,
but tied to you and what your best interests are.
And, honestly, I think variable mortgages long term,
whether interest rates are going up
or whether they're going down,
or whether they're staying flat,
are almost always going to outperform.
My wife and I, we've carried variable-rate mortgages
even when interest rates were going up, and,
lo and behold, it's proven to be a benefit.
So that's our three criteria.
Please, before you make that choice
to lock in your variable-rate mortgage,
consult a mortgage professional.
And, again, do us that favor, hit the subscribe button,
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Cheers.