BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

It’s not hard to figure out that fixed rate mortgages now cost about the same as variable rate mortgages. With that in mind, most people choose the long-term security of a fixed-rate mortgage loan, these days.

It turns out that people flocked to variable mortgage rates just because the rates were lower. Now that fixed rates are about the same price, variables are all but gone.

The shift from variable rates to fixed rates is most interesting after many people have been enjoying the major benefit of variable rate mortgages over the past years: super low rates with a substantial extra discount.

Just over a year ago, prime minus 0.80% was quite common, today the very best you can probably get is prime minus a few points and even that appears to be hard to get. There was even talk of prime plus a surcharge for new variable rate mortgages. Economic developments and lender business motives have shrunk variable discounts beyond expectations. Banks are now as bold to quote prime rate for variable rate mortgages. The discounts are gone!

This is how that works: when the discount on variable rates is being reduced, your effective interest rate is going up. Many people do not like that and start looking for alternatives. The most likely alternative is, of course, a fixed-rate mortgage loan.

How can anyone argue with the tremendous value of fixed rate mortgages right now. Three percent money, guaranteed for years ... what more could one want?

FOR NOW, FIXED RATES RULE

Aggressive five-year fixed rates have been creeping close to 3%. The spread between variable and fixed rates is very small at present. A spread that tight doesn’t occur very often; it makes you rethink all of the research that has been suggesting that variables are the way to go.

Historically speaking, people have saved money on variable-rate mortgages “most of the time” with estimates ranging towards the 80% in favour of variable. Such odds have stopped many people from signing up for a fixed mortgage. This story has changed a little bit.

Since interest rates have generally been trending downward for two decades, it’s safe to say that the bottom of the rate-reduction long-cycle must have been reached. Rates cannot drop much below 1% because negative interest rates are quite unheard of in the world of finance (yet technically possible). By default, rates will have to go up at one point.

With current mortgage rates at virtually record lows, most financial experts agree that a further downward rate move of any substance is fairly impossible.

WHEN DOWN IS NOT POSSIBLE, UP BECOMES LIKELIER

The knowledge that rates cannot go down (much) and possibly must go up at one point (rather sooner than later), makes for a logic that a locked-in interest rate might be a safer bet than a variable rate debt, all other things being equal. The 80% secure (historic) proof that variable is better than fixed might give way now to the pragmatic logic that lower isn’t possible.

Most people will agree that the rates are actually quite fine right now and that most borrowers would be ever-so happy if they stayed like this for a long, long time.  However,  the most we can realistically hope for is an extended period of horizontal rate movement.

“Hope” isn’t even the right word. This is because we might fear that rates will only stay low if the economy fails to perform. After all, we have a bit of inflation going on as well – and that needs to be paid for too. It’s therefore quite safe to say that borrowers won’t see the same advantage to variable rates as they have in the past 20 or so years.

Technically, it's still possible that rates drop further - although most economists agree that's hardly possible. After all ... how much lower could one even go?

BUT WHAT IF RATES DO DROP?

This isn’t meant to imply that fixed rates now have an insurmountable edge. If the Bank of Canada drops rates unexpectedly, a variable could easily beat all other terms over the next five years. In that case, the five-year fixed would be like an expensive kind of insurance premium.

If the Bank of Canada’s next rate move is up (which is the highest probability outcome, say economists), the boring old 5-year fixed could certainly outperform. That’s true even when compared to a variable with payments set at the 5-year fixed rate.  Of course, there are also 4-year rates that are extremely strong right now. A nice thought is also that if you go fixed (while variables end up winning), you’ll likely be out far less money than in most prior years.

An important thing to remember is that financial markets are fluid. If there is a special offer on (say) 4-year money today, then that may be different options in a week or even sooner. Who knows, a 3-year product might suddenly become an option. Things change in the financial markets – they do so very frequently.

A brand new mortgage is one thing - a mortgage renewal or refinance gives you similar options with comparable choices that are worth exploring.

THIS APPLIES NOT JUST TO NEW MORTGAGS

The above thoughts apply only to mortgages that will be newly underwritten NOW as well as to mortgage renewals that need to be decided on soon because the “term” is up.

Obviously, if you’re already in a discounted variable, the conclusions drawn here may not apply to you or if they apply to you, they would do so to a lesser extent. Many banks, however, offer mid-term mortgage solutions sometimes referred to as blend-and-extend. Those would be interesting for borrowers that have seen rates on offer that are much lower than their contracted rates. In that case, you can call the bank or your mortgage representative.

For guidance on locking in a mortgage, always consult a mortgage professional. This blog page is a forum for discussion but not a source of mortgage advice.

You could find out substantially more about mortgages if you like - a great idea to become well-informed before even talking to a banker or mortgage specialist.

MORE general mortgage information (but not advice) can be extracted from the following blog articles:

About mortgage rates now and later: http://www.mennorealty.ca/Blog.php/record-low-1

The average $151,000 mortgage: http://www.mennorealty.ca/Blog.php/mortgage-151000

Looking towards financial uncertainty? http://www.menno.ca/?p=19564

Worth considering how rates can be this low: http://www.menno.ca/?p=19607

What is there to know about your credit score: http://www.menno.ca/?p=19770

Special on refinance and renewal: http://www.mennorealty.ca/Blog.php/renewal-1

About mortgage pre-approval or rate hold: http://www.menno.ca/?p=19593

Lowest rates on mortgages: http://www.mennorealty.ca/Blog.php/buy-more-lowrates