You wouldn’t think that banks could make money off of something intangible like “worry” – but they can.
Stay with me here, because I’ll prove it to you.
When it comes to getting the best rate for your home loan, you may have been told by friends and family, and even the banks that “fixed rate is the way to go”.
After all, when you look at it, it’s dependable. It never changes, no matter what happens in the housing market.
Sounds like a smart idea, right?
But if you dig a little deeper, you’ll see that three things are absolutely certain:
- Canada is heavily reliant on real estate
- Canada is heavily reliant on oil
- Canada is heavily reliant on the U.S.
These core points aren’t going to change anytime soon. And because it’s in our best interests as a country to encourage people to invest money back into Canadian markets – real estate is a safe bet for many.
Fixed rates are all about hinging on your worries about what might happen in the future. That’s why they’re at the rate they are. They’re betting on your worries that one of the aforementioned certainties above is going to change.
They aren’t. At least not for the foreseeable future.
Meanwhile, historically low variable rates are consistently beating out fixed rate mortgages – and they’ve done so consistently for the last 40 years.
Need more proof?
Fixed rate pricing is tied to Canadian bond yields. Canadian bond yields are tied to U.S. bond yields. Under the Trump administration, there’s a high expectation of increased government spending and as a result, higher rates on fixed rate mortgages. It has everything to do with the U.S. markets and nothing happening here at home.
Now, I don’t know about you, but I’d rather not tie my mortgage to something that’s happening in another country, if I can avoid it.
Variable rate mortgages are tied to the prime rate and in turn, the Bank of Canada overnight lending rate. The BoC is not looking to hike rates anytime soon, since that would devastate the very (supposed) drivers of our economy – namely manufacturing and exports.
Add to this the potential of an anti-trade program forming in the U.S. and you’ll see that the potential for even greater rate easing by the BoC is highly possible.
Even if you’re not much of a gambler, think about this: If you’re concerned about real estate values the most perfect hedge against them is a variable rate mortgage. If your home price continues to sky rocket and the Canadian economy decides to start growing like crazy than maybe, maybe your variable rate mortgage might increase. But you will have done well everywhere else in the economy. If however we continue on our uncertain trajectory, then…. You will be much better off in a Variable Rate mortgage, as the Bank of Canada contemplates ways to stimulate our economy without overheating housing.
We’d be delighted to discuss more of the pros and cons with you and work with you to get pre-qualified or pre-approved for a home loan. Because we sincerely have your best interests at heart, you know we’ll always be working hard for the common good of our clients – and not our wallets.
Let’s talk! 416.766.9000
Your Friends at MorCan Direct