The debate about fixed over variable is starting to heat up again as the spread between fixed (3.59%) and variable (2.25%) is shrinking. Over the past 3 years my father and I have observed a very interesting trend of borrowers preferring variable over fixed rate mortgages but that wasn’t always the case.
My father was an early adopter of variable rate mortgages in the early 90s when they were first introduced and had a hard time convincing clients of the benefits. Since the crash, anyone in a variable rate mortgage ended up taking advantage of the unprecedented low prime rate benefiting tremendously. Mortgage borrowers who would have normally opted for the relative safety of fixed rate mortgages have taken note and are now asking for variable over fixed. But the decision to take a variable vs. a fixed must be made in the context of trends and economic indicators which is difficult for most borrowers to understand on their own.
Recently Boris Bozic, president/ceo of mortgage lender Merix Financial, wrote an excellent post on his blog entitled Rolling The Dice which I’d like share with you:
Rolling the dice is perfectly acceptable when you’re in a casino in Las Vegas. I know from first-hand experience that playing “craps” in Vegas can be a rush. For those of you who may not be familiar with the rules or finer points of “craps”, and would like to give it a try next time you’re in Vegas, DO NOT ATTEMPT TO PLAY UNLESS YOU UNDERSTAND ALL RULES! Now that you’ve rolled your eyes and are thinking thanks for enlightening me Bozic, the fact is many do play without understanding all the rules. Why? Because that’s where the action is and where all the noise is coming from. The noise draws you to the table, and when you get there you think I want some of this. You find yourself placing bets, not even understanding what your odd’s are. You might even start mimicking the bets being placed by other gamblers at the “craps” table. You look down at the table and you’ve got all your bets covered. Come on shooter, make this a magical role. Then you hear the most dreaded words at a “craps” table, seven out…seven out. For those uninitiated that means all your chips are gone! That’s when you start thinking if you only had played blackjack instead you could have played for much longer. But that’s gambling and it’s a part of the experience. That’s okay for Vegas but maybe not so much so when choosing between a fixed rate mortgage and an ARM.
The reality is that many borrowers are rolling the dice today. I’m setting aside those borrowers that can withstand the rate variances, and have the stomach to ride out an ARM for 60 months. I just wonder about borrowers who truly don’t understand the rules of the game. I wonder if some borrowers are placing mortgage bets based on what their neighbor or co-worker did with respect to their mortgages. Maybe borrowers are being influenced today by advertising. The 50/50 mortgage is getting a lot of airplay today, and that product was designed for those that wanted to play it safe or safer. Maybe it’s all about today and they’ll worry about tomorrow, whenever tomorrow comes. Maybe all of the above plays a part in the decision-making process but the biggest influence is the brokers personal bias.
All I know is that at some point in the not too distant future rates are going up. The warnings and predictions have been there for all to see for some time now. For example, Bank of Canada Governor Mark Carney recently said the following, “Low interest rates today do not necessarily mean low rates tomorrow,” warned Carney. “Risk reversals, when they happen, can be fierce; the greater the complacency, the more brutal the reckoning.” There’s no ambiguity there, and I’m thinking he might be one of those people “in the know”. The way I look at it any five year mortgage, under 4%, is free money. It’s also 60 months of peace of mind for the borrower. I can’t help but think if borrower’s get squeezed by a rate hike, and then they ask you how did this happen, irrespective of the facts all they will hear is, seven out…seven out.
If you are indecisive about taking a fixed or variable give me a call at 416.461.0204ext2. I guide home owners like you everyday and best of all my services are free of charge to you.