- Hey, welcome back, it's Nolan Matthias
and today we are talking fixed
versus variable rates in 2021.
And at the very end of this video
I will give you the exact strategy that we're using
and recommending to our clients.
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Okay, so let's get into it,
let's talk about variable
versus fixed rate mortgages in 2021
because the rules have changed,
the game has changed,
the Bank of Canada's direction has changed
and that means we need a different strategy
than we have needed in the past.
And my biggest concern right now
is people who are taking five-year fixed rate mortgages
and what that means for them five years down the road.
Because here's what we know,
we know that the Bank of Canada has said, unequivocally,
that interest rates are going to remain low
until at least 2023.
Which means after 2023
they expect that they could start going up
and it may take a little bit longer than that
or they may start going up immediately in 2023.
However, if you lock into a five-year
fixed mortgage right now,
what that means is that in 2026,
you are going to have to renew your mortgage
and you very well could be renewing
into higher interest rates.
And to me, that is the biggest risk
for a borrower right now in today's market.
It's not what's happening right now today,
it's what could happen five years down the road.
So what we're trying to do is make sure
that we can minimize that risk for people
and make sure that you aren't finding yourself
in a position where you have to lock into a mortgage
at a significantly higher rate,
and because you had a five-year fixed mortgage
with a big penalty,
you have no other options but to do so
because you won't be able to make changes
between now and 2026, at least not very easily.
So in the past when we've talked about
variable versus fixed rate mortgages,
we've talked about two things to consider
when you're getting those mortgages.
The first is the spread between the variable
and the fixed rate mortgage,
we typically recommend a quarter
to a half a percent difference
between those two rates
before you start considering a variable,
however, now we're considering that
if you can get a variable on a fixed
at the exact same price,
knowing that at least for the next two years,
you're not going to have to worry
about interest rates going up,
well, then we definitely suggest taking a variable.
The other thing that we've suggested
is that you consider both your risk tolerance
and if you're in a relationship,
your spouses risk tolerance
when it comes to having a mortgage
that could increase in payments.
And that has changed drastically
because now what we're talking about
is not the risk tolerance
with respect to interest rates going up,
we're talking about the risk tolerance
with respect to interest rates jumping significantly
in five years upon renewal.
And what we're doing
to try to mitigate that potential issue
is we're putting people in variable rates
so that their interest rates gradually increase,
and therefore they don't have to worry
about a big payment jump in five years.
What we wanna do is we wanna do two things,
make sure that we don't renew
into that higher interest rate
but also that we are extending the amount of time
that we can get a low interest rate for.
Because, here's what you know
if you get a five-year fixed mortgage rate right now,
you know that for the next five years
you are going to have a low rate.
However, you don't know
what it's going to look like after that.
But with a variable rate mortgage right now,
what we can do is take a variable,
have a low rate for the next two to three years
and then when interest rates start to rise,
then we can start looking at options.
So, maybe we lock into a five-year fixed
at that point in time
and we extend our rate runway from five years
to eight to nine to 10 years
by using a variable for a short period of time
and then switching into a fixed
and therefore getting a longer period at low rates.
Or perhaps what we do is in two or three years,
when interest rates start going up,
we look at other variable rate strategies
and see if we can lower the rate
by getting higher discounts and whatnot.
But the main thing here is that we're mitigating risk
by understanding the fact that we pay a premium
for a five-year fixed mortgage,
both on the interest rate
and also on the penalty down the road.
Variable is very much the strategy of the day.
Since July, we have not had a single client
who hasn't taken a variable rate mortgage with us.
And quite frankly,
it's because they know that they're going to be able
to extend the amount of time
that they can get a low rate for
because the Bank of Canada has said, very clearly,
the next two years are basically low rates.
So, you get to hold a variable rate mortgage
for the next two years
without risk of interest rates going up.
Now the other thing that you get to do
by holding a variable rate mortgage
over the next two to three years is
if the discounts increase,
you have the opportunity to refinance your mortgage,
pay a three month interest penalty,
which is usually about one and a half payments
and get lower rates by taking advantage
of being able to refinance
and switch to a different lender.
Now this is where product selection comes into play
because you wanna make sure
that if you're taking a variable rate strategy
that you are steering as far clear
of discount rates as possible.
Yes, it might seem tempting
to take an ultra low variable rate at prime -1.5%
because you think that rates can't get any lower,
but here's the problem,
the problem is that when you go to lock-in,
the bank basically has control
because what comes with a discount mortgage
is often what's called a bonafide sale clause
or basically a no refinance
and a no leave to go to a different lender clause.
And what that means is that in two to three years
if you go to lock in your variable rates
because it is clear
that interest rates are starting to go up,
well, you may not be able to get the best rate
when you go to lock-in.
Because if they know that you can't leave
and go to a different lender,
what is their incentive
to give you the best rates that are available?
There are either going to tell you, "Hey, listen,
you gotta ride it out and keep that variable rate.
We don't care if interest rates are going up
or you're going to have to take a slightly higher fixed rate
than what we might otherwise offer you,
quite frankly because you don't have the ability to leave
and you have no other options."
So making sure that we get the right product
for this variable rate strategy
and for variable rates going forward is hugely important.
And there's two that I suggest.
The two that I suggest are Scotiabank and First National.
The reason why, and you can this in our other videos
about the best banks in Canada to get a mortgage,
is quite simply that they have the best mortgage products.
And what I like about First National and Scotiabank
is that one, First National only carries one set of rates,
it's their best rates,
so if you go to lock it in
you're paying whatever the market rate is
not some inflated rate
because you can't leave the lender
or because they want you to negotiate.
And if you take a Scotiabank mortgage,
it has all the tools, all the bells and whistles,
but also the ability
to pay that three month interest penalty and leave,
if they don't offer you a good lock-in rate.
And what that gives you is that gives you
the power to negotiate.
And as soon as you take a discount mortgage,
you're losing your power to negotiate
after you've signed on the dotted line,
but having a Scotiabank or a First National mortgage
that isn't a discount rate
really gives you the power to do things in the future
that will save you a pretty significant amount of money
including refinancing to a lower rate
if variable rate discounts get better.
Now, a lot of people are gonna watch this video
and they're gonna say, "Hey, I can do this,
I can manage this myself,
I'm gonna go ahead and get a variable rate mortgage.
I'm not going to call Nolan
and I'm not going to do it through Mortgage360
or a mortgage broker
because I think I can manage this on my own."
And some of you may be right.
But the majority of you
are going to wanna have somebody
to manage the strategy for you from two perspectives,
one, is there's going to be points
where there is gonna be a temptation
to wanna lock in a mortgage rate
because it looks like fixed rates are going up
but other rates are staying the same.
And you're gonna wanna have somebody
who can talk you off that ledge
if you're thinking about locking in at the wrong time.
And believe me, we do that quite often
with our variable rate clients.
In the last two years I've had several clients
that wanted to lock in at 2.75 or 3%,
and they are very happy
that I convinced them not to lock in
their variable rate mortgages now
'cause they've saved a significant amount of money.
The second reason you're gonna wanna have
a mortgage broker manage this strategy for you,
specifically a mortgage brokerage like ours,
is because we watch what's happening with interest rates
and we can usually tell two to three to 10 days
before interest rates start to go up
that they're actually going to go up.
Which means that we can let you know
before interest rates go up
that they're going to go up
and then we can talk strategy from there.
We can talk about taking a five-year fixed
or we can talk about refinancing
into a lower interest rate,
or in general we can just talk about
the amount of money that we've saved over the longterm
with respect to taking a variable instead of a fixed,
and then consider whether we wanna actually
lock into a fixed and basically lock in the savings.
Now I firmly believe that mortgages
are like any other form of financial device.
You wanna make sure you have an expert you can rely on
to help walk you through
the difficult decision making process that is ahead.
Because taking a mortgage
that is on a variable rate strategy
definitely requires more management
than just taking a five-year fixed and forgetting it.
However, that being said,
the ability and the potential
to save a significant amount of money over time
is definitely there
with a variable rate mortgage right now.
And let me make this clear as well,
is anybody can save you 0.1%, 0.2%.
We see brand new brokers coming out of the industry,
saving people money and that's awesome.
We see bankers saving 0.1 or 0.2%
all the time for their clients.
However, managing a strategy
and saving tens of thousands of dollars
requires significantly more sophistication
and significantly more effort.
And that's what a really great broker will provide you,
is the ability to save you money over time.
And just that ability to extend your rate runway
from five years to eight, nine, 10 years
at low rates is worth every penny
when it comes to getting a great broker
and getting a great mortgage
like the ones that we promote
at First National and Scotiabank.
And that being said,
this mortgage channel is made possible
by our mortgage brokerage Mortgage360.
And I hope that you would at least consider
giving Mortgage360 the opportunity
to set up and manage this strategy for you.
We belong to a network of brokers
that can help you get a mortgage across Canada.
Ourselves, we are licensed in both Alberta
and Saskatchewan and are just in the process
of finishing up our BC and Ontario licenses,
so we very much can help people across the country.
Mortgages these days, thanks to COVID,
are very much done over online and over the phone,
so we are happy to help you in any way that we can.
And in addition to considering Mortgage360
for your mortgage,
I'd also love it if you did us that other favor
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