As a real estate agent it’s pretty much common knowledge that the vast majority of your homebuyer clients will be purchasing their new home with a mortgage. There are a few buyers who are sufficiently deep-pocketed to buying a home outright without the need for financing, but they’re few and far between these days. Being regarded the way you want to be by your clients is a product of being seen as an expert on every aspect of buying or selling a home, and the ins and outs of securing financing in the best way is a part of that.
Buyers will have a choice of a fixed or variable mortgage when buying their home, and these days in Canada it’s a much more costly option in the long run to choose a variable mortgage. This is true in the face of that being very different from the way it’s been for decades where choosing a variable mortgage had many advantages to it.
Here at Real Estate Leads, our online real estate lead generation system for Canada is a great way for you to get more out of your client prospecting efforts, and then share your expertise on anything and everything related to real estate – including what are their best choices when moving on to working with a mortgage provider. With that understood, let’s look at why variable mortgages are more often not the best choice anymore.
Understanding Variable Rate Mortgages
A variable rate mortgage involves the interest rate not being fixed for the life of the mortgage. Instead of being locked in a higher interest rate, the borrower has their interest calculated monthly and based on the lender’s prime rate (%). This can be a positive or negative for the borrower, depending on the type they have.
Conversely, a variable rate borrower pays a fixed monthly sum, but the amount paid towards the principal will change depending on whether the lender’s rates go up or down. If rates go down, you pay less interest and then more goes towards paying off your principal loan. This means your balance is reduced faster, and this has the potential to save you a significant amount of money. If your rate goes up, then you pay more in interest and reduce less of your principal loan amount. As you can see, that can cost you a lot more.
Over the past year, the variable mortgage rate has jumped considerably, and that’s been very disadvantageous for homeowners who chose variable rate mortgages
The Estimated Canadian Variable Rate Mortgage Is Now Up Over 22%
The cost of a variable rate mortgage has been increasing across Canada. The Bank of Canada has stated that the typical rate reached 2.72% on December 6, which is a jump of 2.25% from a month previous. The rate is now over 22.52% higher than it was at this time last year. The impact of this for borrowers is very substantial.
At mid-December last year it was at 2.23%. In late January of 2018 it spiked to 2.45% but in June it had levelled back out to 2.35%, but in July it began to climb hard. In October it shot up from 2.49% to 2.66% and his been rising ever since until now.
Paying More To Borrow The Same
Let’s look at that in real world impact. A borrower at the estimated rate who borrowed last year, would now have their interest payments sitting at a 22.5% higher rate. If they make the same payments, the amount paid to their principal would decrease by about 6.6%. When their variable term ends, they will have paid much more cash to the bank and made much less progress towards paying off their mortgage.
Interest rates fell for years, but now they’re starting to climb decisively. It used to be that variable rate mortgages worked in favour of borrowers, but as rates were cut these borrowers made principal contributions that tended to be higher. Now the scenario is exactly the opposite. Variable rates are rising in response to increasingly heavy mortgage debt levels, and this of course is making it more difficult for homebuyers to make real progress in paying their debt.
Long story short, advising your clients about the greater advisability of a fixed-rate mortgage these days may be something you’ll want to do.
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