Robert McLister: Up to 50% going that route as more people bet interest rates will drop
More people are choosing variable rate mortgages on the expectation that interest rates have further to fall.
Expectations of further rate cuts have people piling into variable rates like they’re the last choppers out of Saigon. Several lenders now report that up to 50 per cent of mortgage applicants are opting for floating rates.
Compare that to last year, when variables were about as fashionable as cargo shorts at Milan Fashion Week and uptake was a mere 14 per cent.
People are sprinting into variables for several reasons:
They expect the Bank of Canada isn’t done easing
Floating rates are finally on par with fixed rates
It’s therefore easier to qualify for variables, given how the government’s mortgage stress test calculation works
Standard variable mortgages have prepayment penalties of just three months’ interest (fixed penalties often run more than four times that)
Some people like that payments on adjustable-rate mortgages can drop (irrespective of the upside risk)
Variable borrowers can lock into fixed rates anytime
Numerous academic studies support floating rates
On that last point, the numbers man behind Canada’s most-cited variable-rate research, York University professor Moshe Milevsky, is still pro-variable. His studies show that choosing variable is like playing roulette where the ball lands on black more than seven out of every 10 spins — except here, the house is literally your house.
“All else being equal, and if I know nothing about you, then my ‘go to’ position is variable, as it always has been,” he says. “That’s for those listeners who don’t have the patience or time for anything other than a simple binary answer.”
But term selection isn’t a one-size-fits-all proposition. That’s especially true today when even central bankers don’t know where rates will end up. In fact, virtually no one is sure whether slowing growth will trump tariff-driven inflation (pun intended).
Milevsky reminds us that choosing a fixed or variable rate isn‘t the only answer.
“I am a fan of hybrid mortgages,” Milevsky says. That’s where part of the mortgage is fixed, and part is variable.
“For those who take a more pensive and intellectual approach, especially if their ‘human capital’ (i.e., their job, wages, salary, etc.) are tied to the interest rate cycle, then a hybrid and diversified approach is the right way to manage this risk,” he says.
It’s similar in principle to how prudent investors approach retirement investing.
“I never quite understood why smart and rational consumers who own hundreds of different bonds for their fixed-income assets, such as ETF and mutual funds — with different coupons, maturities, and credit ratings — all in the name of diversification of risk, then decide to speculate on one single debt instrument for their liabilities.”
Selecting a mortgage term is like choosing your roommate for the next five years. It pays not to rush it.
Effective term analysis involves analyzing one’s:
Available rates
Income stability
Equity
Non-housing assets
Five-year plan (i.e., their probability of moving or refinancing early)
Stomach for rate volatility
Ability to handle worst-case payment scenarios
Potential upside, given the market’s forward rate outlook
Interest rate exposure elsewhere in their lives, and so on
Milevsky believes your typical mortgage salesperson is “completely ill-equipped and untrained to make any of those personal balance sheet determinations.” He suggests speaking to a professional financial advisor “before you do anything involving hundreds of thousands of dollars of your life.”
Alternatively, find a mortgage advisor with years of experience who takes a holistic view of mortgage planning. If someone quotes you a rate faster than you can say “interest” without delving into your specific situation, they’re probably the wrong banker or mortgage broker.
In any case, few are clairvoyant enough to outguess the market on rate direction. Not even all-star economists or the Bank of Canada consistently do it beyond a few quarters. History shows that unless rates are well above average and topping out, or well below average and bottoming out, rate forecasts are largely a crapshoot.
Forecasting mortgage rates is akin to predicting the bond market amid a whirlwind of unpredictability and surprises. Professional bond investors try their best, but to have even a small shot, they learn how to read trends in indicators like average core inflation (U.S. and Canadian), inflation expectations, real GDP growth, the output gap, unemployment versus the natural rate of unemployment, wage growth, fiscal stimulus pass-throughs, oil price pass-throughs, currency pass-throughs, retail sales, business capital expenditures, shelter prices, global supply chain pressure, leading indicators and breakeven inflation rates in the bond market.
Easy as pie, right?
Most borrowers would prefer living their lives over becoming financial Nostradamuses. That’s why many simply trust their cursory research or someone else’s opinion, then take their chances with either a variable or fixed rate. But given it’s so hard to be right, many borrowers are better off with both.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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