- Hey, welcome back, it's Nolan Matthias,
And today we are discussing why variable rate
mortgages, contrary to popular belief,
are safer than fixed rate mortgages.
But before we get into it, do me that favor,
hit that subscribe button, hit that notification bell
and please hit that like button so more people like you
can see this video and leave me your questions
and comments about variable versus fixed rates
in the comment section below, I'll get to them right away.
Okay, so let's get into it.
Let's discuss why five-year fixed mortgages
are less safe than variable rate mortgages.
And there's three major reasons why,
and I'll start with this.
The first is that five-year fixed
are really just adjustable rate mortgages.
They just don't adjust as quickly as normal mortgages.
If you look at it in the context of American mortgages,
in the U.S you can get a 15 or 30-year mortgage
that has the same rate from start
to finish without any penalties, if you wanna refinance
or if you sell the property.
That's significantly different than
the Canadian style mortgage which is a five-year fixed.
And what a lot of Americans look at when they see
a five-year fixed mortgage is
they see a five-year adjustable rate mortgage.
And the reason why they see a five-year adjustable rate
mortgage is because every five years, your payment adjusts
along with the interest rate that you pay.
So in reality, that five-year fixed
is just an adjustable rate mortgage,
it just has a set period of adjustments every five years
rather than whenever the Bank of Canada
moves interest rates.
And the problem with that, and the risk associated
with that is that if interest rates start to rise
in the middle of your five-year term
you could end up renewing into a higher interest rate.
And that could create what we call payment shock.
That's when you renew your mortgage
and your interest rate has gone from 1 1/2% to 3%,
and all of a sudden, as a result, your payment's gone
up substantially without you expecting it.
And therefore creating financial hardship.
The difference with a variable rate mortgage
is yes, you'll still see your payments increase.
However, you'll see them increase more gradually
over time as the Bank of Canada increases interest rates.
And as a result, you'll feel the pain in smaller amounts,
and therefore you'll get more used to it quicker
rather than it all happening overnight.
And the key to getting a variable rate mortgage
is to get one with adjustable payments.
So one where as interest rates increase
your payments also increase.
so that you can feel that payment increase over time
rather than all at once at the end of your term.
And, you also get the added benefit of the fact that
as interest rates decrease,
your payments will decrease as well.
So as interest rates fluctuate, your payments will fluctuate
in line with where interest rates are going
and what's happening in the economy.
And if your mortgage is set up in this way
you can rest assured that you aren't gonna have
a massive payment shock sometime
throughout the life of your mortgage.
Now, the second reason why variable rates
are safer than fixed rates
is because variable rates outperform fixed rates.
It's just the reality of it.
Very rarely will a fixed rate perform better
than a variable rate.
There's only been three times in basically last 25 years
where that has happened.
And it is typically when you can get a fixed rate
for a lower price than a variable rate.
So normally variable rates are run
at a lower interest rate than what fixed rates do.
Well, the times where you will save money
with a fixed rate is when that inverts and you
can get a lower price fixed rate than a variable rate.
And oftentimes when you can get a lower price fixed rate
it's better to take a one or two year fixed
rather than a five-year fixed so that you can still
kind of have a little bit of a variable rate strategy
but also take advantage of the lower rates at the time.
Now it doesn't matter which direction interest
rates are going.
Variable rates will still outperform fixed rates.
And the reason why is because interest rates fluctuate.
And when you have a variable rate,
you don't only feel the pain when interest rates go up
but you also get the added benefit
when interest rates do go down
and what central banks have a tendency to do is overshoot.
When they raise interest rates,
they often raise them too much
meaning they have to bring them back down.
And that fluctuation in interest rates
is what ends up making it so that
variable rates outperform their fixed rate counterparts.
Now also think about the fact that let's say
you are borrowing at 1.5% on a variable rate
and the going rate for a five-year fixed is 2%.
So you've got a 1/2% lower variable rate mortgage.
Well, think about this, okay?
Let's say you get that 1/2% discount for the next two years.
And then the Bank of Canada starts increasing
interest rates.
Well, they would have to increase the interest rate
by 1/2% for you to be even.
That's what most people think.
But that's not exactly true because it isn't 1/2%
that they have to increase the rates by for you to be even.
Because you've had all that time where you've had a 1/2%
lower interest rate than you would have
in a five-year fixed.
So in reality, you would actually have to have
the Bank of Canada increase the interest rates another 1/2%
over and above that original 1/2% increase.
So by percent total, in order for you to be break even
now the chances of interest rates going up
by a percent in a five-year period.
When interest rates are this lowest slim to none.
Now, the other thing to note about variable
versus fixed rates and the long-term prospects
for variable rates is that you shouldn't be taking
a five-year fixed thinking that interest rates
have nowhere to go but up.
Because the reality of it is,
is when interest rates are as low as they are right now,
which is near zero.
It takes a very long time for interest rates to increase.
Now I'll point to 1935 to 1970.
Where it took interest rates, 35 years to increase
from 2.5% to 7 1/2%, so 35 years to increase 5%.
And I'll also point to Japan in the early 1990s
that when they started their 0% interest rate policy
they did not expect that it would take 30 years
for them to get to the point where
they could start increasing interest rates.
And that's where they're at right now.
They've had almost 30 years of low interest rates.
So for the majority of borrowers who are getting a mortgage
in 2021, there is a very high likelihood
that your mortgage will almost be paid off
before interest rates go up substantially.
Meaning that a variable rate strategy is going to be a far
better strategy than what a fixed rate strategy will be
over the next 25 to 30 years.
Okay, and the third and final reason why variable rates
are safer than fixed rates is because of penalties.
Penalties are the single biggest banking fee
you will ever pay in your lifetime.
And most people when they're getting a mortgage
are thinking about wanting to save 0.1 or 0.2%
which is the equivalent of saving two or $300 a year.
And not realizing that the single biggest expense
you will have on your mortgage is in all likelihood
not the interest rate, but the penalty.
Because here's the reality of life.
Life is variable, just like your mortgage should be.
And when you see things happen, like people end up
losing their jobs or marriages dissolve, or you have kids
and you need a bigger house or something like that
maybe you get transferred from one location to another.
Well, the reality is most people in their lifetime
are going to see some sort of penalty on their mortgage.
And unfortunately, if you've got a fixed rate mortgage
that penalty is going to be high probably,
in the 15 to $20,000 range.
And if things go wrong, let's say you do need
to sell your property to get some of your equity out
while you're already gonna be paying a realtor
three to 4% of the value of your property, maybe more.
And if you've gotta give four or 5% of the value
of your property to your bank as a penalty,
well, that decision to take the safer, more reliable
fixed rate mortgage ends up being a bad decision.
And what was ultimately a very risky decision
because you didn't realize the penalty was the biggest risk
associated with that mortgage
and with losing the equity in your property.
The other thing people don't realize
is that when you've got a variable rate,
you've got the flexibility to pay
a three-month interest penalty
and also lower your interest rates.
So as discounts get bigger,
and you get the opportunity to save money
having that low penalty allows you the flexibility
to take advantage of lower interest rates
and basically mortgage planning that allows you to pay
off your mortgage sooner, ultimately saving you
tens of thousands, if not hundreds of thousands of dollars
over the life of your mortgage.
So here's the reality of it.
Is the biggest danger in a mortgage in Canada
is having to pay a penalty, especially a big bank penalty.
And we don't understand why more people don't know this
but the reason we make videos like this, where we talk
about why variable rates are significantly safer
than fixed rates is because that penalty risk is
the single biggest reason why a variable rate mortgage
is safer.
And for my wife and I, we've known this,
we're in the industry, most people in the industry
will only take variable rate mortgages,
they'll rarely take fixed rate mortgages
because fixed rate mortgages like I said, in the beginning,
even though they seem like they are a safer alternative
to a variable rate mortgage because the payment
is going to be the same.
In Canada, the reality is they are just long-term adjustable
rate mortgages that come with very high penalties
and often a premium at a higher rate that you have to pay
for that total five-year period.
So take it from me.
Variable rates are the safer alternative
to fixed rate mortgages.
It may not seem like it, but do your research.
And I'm sure you will find that over time,
your variable rate mortgage will not only outperform
your fixed rate mortgage, but will give you
a lot more added safety and security
when it comes to your finances.
If you enjoyed this video, do me that favor.
Hit that subscribe button, hit that notification bell
and please hit that like button.
So more people like you can see this video
and leave me your questions and comments.
What do you think?
Does a variable rate seems safer now
that you know all the ins and outs
or are you still a fixed rate borrower?