Variable versus Fixed

Buyers often ponder what type of mortgage is best: variable rate or fixed rate. At first glance, a variable rate mortgage (VRM) look more attractive – as they are typically lower rate than a fixed mortgage. However, VRM’s fluctuate as banks adjust their prime rates to follow the Bank of Canada’s overnight rate. On the other hand, a fixed rate mortgage (FRM) offers the assurance that the rate will not change over the duration of the mortgage. A few lenders offer a hybrid mortgage, where the mortgage is a blend of VRM and FRM.

Things get even more confusing when deciding the term of the mortgage: 1, 3, 5 or more years? How about an open mortgage (which can be paid off any time) versus a closed mortgage (restrictions/penalties if paid down early)?

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History has shown that over the term of the mortgage amortization, most of the time a VRM is cheaper that a FRM. However, when periods (such as now?) when the general consensus is that VRM’s and FRM’s are about to rise – locking into long-term FRM may be the better choice.

It is worth considering what happens if paying off the mortgage early, whether: renewing before the term is up (to “lock in” a lower rate), switching mortgage providers, or even selling the property. Check the fine print for each mortgage provider, but typically if the terms of a VRM are broken early, just 3 months interest are charged as a penalty. For a FRM, a hefty Interest Rate Differential (IRD) is typically charged by the lending institution. The IRD can range from a few $1000’s to $10,000’s – so if there is a chance that you will be wanting to “get out” of your mortgage early, the VRM is the better option. The following site has some good examples for comparison:

Let the discussions begin!

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40 thoughts on “Variable versus Fixed

  1. Pingback: Affordability (Part 1) | House Hunt Victoria

  2. Looks like the big money is seriously short Canada housing. China stock markets are tanking, which means margin calls, and less money to flow here, especially if the money launderers pack up shop.

    “The cross-currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” he said.

    “A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street. It’s as clear as day that the market is a Chinese money laundering mecca.”

    “All of the big global macro funds that were involved in betting against the U.S. in 2007 and 2008 and 2009, they’ve all studied Canadian housing for a few years,” said the analyst, who asked not to be named because of client confidentiality. “I know a number of them are shorting Canadian housing. It looks like an accident waiting to happen.”

  3. In comparison to Langford and Colwood is Victoria and Saanich East. But with 180 sales in the last 30 days and again a smidge over 300 houses listed for sale

    Holy Crap!

    That’s under 2 months of inventory with half the homes selling in less than 18 days at a median price for these two historically middle income areas at $647,500. Sales activity is up almost 50% from last year in these two areas and the median price up 10% from this time last year. This is the sizzling market people are talking about.

    You poor bastards that are trying to buy in this insanity. You’ll likely have to pay in excess of market value to get a home in these hoods. Might as well give the home owner a blank cheque and ask them to fill in the amount.

    What’s the difference between buying a home in Victoria and dealing with a terrorist.

    – At least you can negotiate with a terrorist!

  4. There must be someone on this blog that is interested in the Langford and Colwood housing market?

    A smidge over 300 house listings, another 130 condos for sale and 119 other types such as half duplexes, manufactured homes, town houses, etc.

    About 100 house sales ranging from a low of $302,500 to a high of 1.3 million. With half of the buyers paying less than $480,000 for a house. A busy market that favors sellers with half the properties selling in under a month. Sales activity is up marginally by 10% from last year and the same with the median price up 4% from this time last year.

    Condo sales are down 27%. But don’t get too worried that just mean 6 fewer sales than last year. 16 condo sales in the last 30 days ranging from a low of $167,000 to a high of $273,000. The typical condo selling at $242,250 or $282 per finished square foot for a top or near floor suite along the quieter side of the complex. Most condos are still selling below their original purchase price from the developers.

    I suspect with a little more than 6 months of inventory of condos for sale we will still see some price erosion on the condo re-sales still to come.

    If you really wanted to live frugally there are manufactured homes in parks around Florence Lake with some units starting at $47,000. Pad rentals are some $550 per month or $6,600 per annum. Dollar for dollar manufactured homes give you the greatest value in today’s market as you’re paying $60 a square foot for the same square footage as a condo in the same area at $280.

  5. You’re right interest rates increased, my mistake. There were also 120 day rate guarantees from the banks. Some prospective purchasers likely felt some urgency to buy before interest rates increased further and they were priced out of housing.

    The rate increase most likely made those sitting on the fence commit to purchasing a home.

  6. Yes, I remember OSB started becoming very popular in the 80s. Not certain whether it was a rule change but probably was.

  7. Here’s the latest affordability index released today (Vancouver versus Victoria). Crazy how Victoria was slightly LESS affordable than Vancouver twenty years ago, and now it’s nearly twice as affordable as Vancouver.

    Anybody think Victoria could match Vancouver’s lack of affordability again over the next 20 years?

  8. Well we are now into the summer and historically market prices in the core slide a bit lower as buyers’ attentions shifts to holidays. But not always. Back in 2007 the housing market powered right through the summer with increasing prices. But then we did have falling interest rates too.

  9. 62 percent of all house sales in the core districts are in the range of $400,000 to $800,000. This is the price range for most households in Victoria.

    45 percent or nearly half of the houses bought in the core since the beginning of the year were between $500,000 to $700,000. Every purchaser is a little bit different but I would guess mortgage payments for middle income households would lay between $2,000 to $3,000 a month.

    For condos, 60 percent of the sales were between $200,000 to $400,000. This would be the starter home market. 36% were between $200,000 to $300,000. I would guess roughly $1,000 to $2,000 a month including strata fees.

    Combining both the single family and condominium market there are two peaks in prices centering around $300,000 and $600,000. The graphs for condos seems symmetric with an even distribution. The same for the detached home market that is fairly symmetric with a small right tail to the graph.

    The graphs suggest stable prices with no significant increase or decrease in prices in the immediate future. If there was something changing in purchasing habits, I would think it would manifest itself in an asymmetric graph of Sales X Price Range. But the graph has remained similar over the last five years. No significant wave of Baby Boomers beaching themselves at Willows or outside stimuli. A boring graph showing local demand as the significant driving force of our real estate market.

    Despite the shortage of listings, the market is behaving nicely with the mode for the last five years unchanged. There still seems to be a small second peak in detached homes at the $1,250,000 which I think might be attributable to non Victorian purchasers from Alberta and Vancouver and some Victorians – probably real estate agents or brokers.

  10. Monday, June 22, 2015 8:00am

    MTD June
    2015 2014
    Net Unconditional Sales: 647 680
    New Listings: 982 1,234
    Active Listings: 4,007 4,695

    Please Note
    Left Column: stats so far this month
    Right Column: stats for the entire month from last year

  11. Getting back to the credit markets, there seems to be some serious liquidity problems popping up which could throw a wrench into the mortgage market should things get out of control. Tight markets in any product eventually get looser and give way to more product becoming for sale which only means things can go in only one direction.

    “If financial crises tend to happen every seven years, it’s about time we start getting worried about possibly the next one.”

  12. Wasn’t part of the rule changes in the 1980’s that plywood was no longer required beneath stucco? I seem to remember a lot of remediation in the 1990’s with “wafer board” exteriors.

  13. Stucco’s not the problem. Any envelope has a lifespan. A 60s stucco building may be nearing its lifespan depending on factors but stucco can outlast the best of them. Actually the “driest” moisture testing we ever had was from a stucco envelope and my bet is we could make 100 years on that one.

    The ones to watch out for (all types of siding) are early 80s onward as governments made a big errors in changing buildings codes.

    The cement fibre siding (hardie) is the way to go today, as you still get the fire rating and thermal & sound insulative qualities of stucco.

  14. Wanted to take a quick mid-month peak at detached houses in the core to see if one income group is driving sales activity more than any other. The mid-point in prices for 305 sales in the urban city cores was $622,500. 305 house lottery winners is quite a bit for the core districts in one month.

    For houses in the core under $530,000 it’s a strong sellers market at 1.3 months of inventory. About 29% of all the sales for the 30 day period

    For the middle range from $530,000 to $715,000 there is no relief, as the sellers are in the driver seat with only 1.4 months of inventory. About 38% of total sales

    The upper middle range of 715,000 to $1,000,000 is still a tough market to buy into with just 2 months of inventory. About 22% of the marketplace

    The uber riche is mostly made up of buyers from Calgary, Vancouver and Victoria the market is balanced between seller and buyer with 4.8 months of inventory. About 11% of the market over the 30 day period.

  15. Don’t buy one of these fractional ownership deals. They are overpriced with generally high monthly fees. If you want to do this set up your own. Co-own a cottage together with others with a clear written agreement that allows for and covers everything that might cause a dispute such as renting out. Much cheaper, more flexible and you can have a shotgun clause triggering sale if someone can’t sell their 1/4 share later.

  16. JJ, IMO
    depends for what purpose the older condo for
    1/ if you want to live in it, buy new if you can afford it
    2/ if you are buying for investment purposes, crack the cap and yield numbers new vs. old

    a friend that works @ a property management generalized that the condos from the 60s, 70s, and 80s were all well built if they were NOT stucco exteriors. Good luck.

  17. @backwardsevolution…do something about it then.
    BTW thank god for government manipulation/engineering for the “success that I might have”. So better revote for every level of government that is in power today! Thanks for the advice 🙂

  18. I would never consider buying a quarter ownership.

    About ten years ago, family member bought (per-construction) a quarter ownership in one cabin at the Currents development at Otter Bay on Pender Island. Bought for $110K, the resale value climbed to $170K in 2008 before plunging to the current resale value of about $75K. In the meantime, the assessment fee (which includes taxes and insurance) is very high (about $500/month), and rental frequency has never been as consistent as hoped for. From a financial perspective – it’s been a loss. It’s used by the owner for about 1 month of each year. If renting, this would cost about $6000/year. Ownership has cost a lot more than that … selling back in 2008 would have been a good idea.

  19. Numbers Hack – “…might want to substitute the ‘DEVELOPED WORLD’S whole economy'”

    I’m not talking about the developed world’s economy. Please don’t try to deflect. I’m talking about Canada. Canada’s economy is being completely steered and engineered by the government.

    “Instead of blaming immigrants…” Did I blame immigrants? Please don’t try to put words in my mouth. My point was that our economy is now basically bringing in immigrants, and everything follows from that.

    “Blessed with our natural resources…” Yes, the government is making a fortune off of Nestles: $500.00/year for millions and millions of gallons of our fresh water. I’m sure it was sold to the highest bidder (sarc)! At least the government raised it from $2.00/year, which is what they used to get. Raking it in for the citizens! Now, there’s instant gratification for yeah. $500.00! Whoahoo!

    “We still live in a world of great opportunity and one based on meritocracy.” What a complete laugh that is! The world we live in is based on monopoly, kickbacks, lobbying, insider information. The government aids and abets by steering and engineering the economy for the vested interests.

    If it was truly based on meritocracy, every single one of the Wall Street banks would have bit the dust in 2008 (bankrupt/insolvent), rates would have gone sky high, homeowners and businesses who bit off more than they could chew would have been left back on Demerit Highway. Instead, they all got bailed out. How’s that for merit?

    “…it is always so easy to point a finger.” A finger really is not big enough. What I find completely astounding is that people like you can’t see how your little world and the success you might have is almost totally attributable to the government’s manipulation and engineering and has little to do with you.

  20. With questionable and lack of depreciation reports along with limited leasehold and co-operative ownership rights are the older condominiums a good deal to buy?

    Anyone thinking of buying any of these?

  21. Has anyone ever thought of buying a quarter ownership in a condo as an investment or a vacation get away? You can have your choice of downtown or on Bear Mountain?

    How much should you pay?

  22. Permit must have been turned down ? Maybe they just paid too much and got burnt. As Jack has posted many examples, not everyone makes money on real estate.

  23. @Michael

    … how would you like it if your grandparents were stopped from immigrating to our little paradise…hmm, haa, huh?

    Very good point. My parents emigrated from the UK in the late 1950’s, such that I’m a first generation Canadian. My wife is “ethnic” Chinese, but she is sixth generation Canadian, as some of her ancestors moved here from California during the BC Gold Rush in the 1850’s and 1860’s.

  24. I have found the methodology for calculating the Consumer Price Index (CPI) to be rather suspect. Check out this video for a bit of an eye opener on how inflation is measured in the US:

    The calculation for core CPI is particularly egregious, as it excludes so many of the items (fruits, vegetables, energy, transportation, mortgage interest rates) that that people spend a portion of their money on. Instead, I prefer the Everyday Price Index (EPI) developed by the American Institute for Economic Research. It measures “the changes in prices of goods and services people buy frequently that have prices that are not contractually fixed. Fluctuations in such prices reflect the pricing risk (i.e. unexpected and unavoidable volatility) consumers face in connection with purchases they cannot easily adjust from one month to the next“. See: EPI Methodology.

    There was a time when the US CPI and EPI closely tracked each other … but since 2002, the EPI has been consistently higher …

  25. Hear, hear! Even aboriginals immigrated here way back when, and how would you like it if your grandparents were stopped from immigrating to our little paradise…hmm, haa, huh? 🙂

    Besides I don’t think you can stop what’s coming… Asia-Pacific will soon own half the world.

    India’s the one to watch. They’re minting millionaires at the fastest pace now… 26% increase last year.

  26. Canada’s whole economy….
    might want to substitute the “DEVELOPED WORLD’s whole economy”

    Instead of blaming immigrants (note we’re all in that boat, unless you’re an native), the biggest issue that Canadians fail to realize is the global economic paradigm started shifting 30 years ago to “knowledge” industries. We don’t see the Silicon Valley guys or software nerds complaining.

    Blessed with our natural resources, Canadians got complacent and are the “now instant gratification” generation. Instead of copying, try “creating” or “discovering”.

    We still live in a world of great opportunity and one based on meritocracy. Instead of b**tcing and blaming someone else (gov’t) for what isn’t right in our world, and there is lots of it; do something about it. Gov’t will ALWAYs be screwed up and it is always so easy to point a finger.

  27. I wonder how much over list it went? I would think a house and lot like that in the west end would go for around 2 million.

  28. Canada’s whole economy is engineered and manufactured by the government: artificially suppressing interest rates, massaging the Consumer Price Index to give the impression of low inflation, allowing amortization rates to increase from 25 years to 40 years (they’re back down now), no doc/cash back/no money down/lines of credit, high immigration numbers, allowing Chinese suitcases of cash into the country with no questions asked.

    So our economy is immigration, building condos for the immigrants, citizens investing and speculating in real estate, service industry jobs – did I mention real estate? The selling-out of our country for short-term gain.

    Way to go, Canada.

    Meanwhile, global warming continues on, and the new trade treaties we’re not watching out for (because we’re too busy counting our real estate riches) will send more of our jobs overseas. But, hey, who cares? What was the monthly house price appreciation again?

  29. Historic Trends…zero interest rate environment…super low mortgages
    NO wonder beef prices are going up!

    …Canada, like most advanced economies, is
    experiencing record low levels of interest rates.
    These rates were initially a response to the
    global financial crisis that broke out in 2008, but
    they have prevailed now for five years, and they
    constitute a danger for future economic stability.
    Below-equilibrium interest rates for an extended
    period distort investment decisions, leading to
    excessive risk taking and inefficient and ultimately
    unprofitable investments. They also encourage the
    formation of asset bubbles whose collapse can lead
    to a recurrence of the recent financial crisis. Some
    of the symptoms of inefficient investment and asset
    price bubbles are already evident in Canada.
    Low interest rates and exceptional monetary
    stimulus, such as quantitative easing in the
    United States, unless reversed in time, will lead to
    generalized inflation, which Canada can escape
    only by raising interest rates. Although notable
    inflationary pressures are not yet in evidence, the
    experience of the 1950s, 1960s, and 1970s suggests
    that inflation dangers should not be ignored, since,
    once built into expectations, they are difficult
    to dislodge. The challenge for Canada is to find
    the right balance between raising rates to avoid
    financial distortions and inflation, while protecting
    economic growth in a context of weak export
    demand by the United States and other trading
    partners. After five years of extraordinarily low
    interest rates, the time has come to reduce monetary
    stimulus to achieve a more neutral setting for
    interest rates.

  30. Interesting how the TC has to resort to describing a Fairfield house fire by it’s selling price. Is this how pathetically obsessed this city and media has become about real estate ? Funny part is the place is now selling for $110,000 less than is sold for a year ago a. So much for the “real estate always goes up in Victoria” theory.

    If buyers/developers play hard ball the seller could take a bath of a couple of hundred G’s in a year. Ouch.

    “The home sold last year for $1.2 million.”

  31. Thirteen years ago, I got a mortgage with the Bank of Nova Scotia for a 3-year term. It was a form of hybrid mortgage (no longer offered) where the interest charged was based off the variable rate, but the payments were based on a fixed interest of 6.6%. This effectively allowed me to pay down the mortgage and little quicker, as the average interest charged was just 4%. The beauty of this mortgage was that the rate was guaranteed to never exceed 6.6% – so I had the best of both worlds: a variable rate mortgage with a capped rate. I’m guess that this was not a particularly profitable mortgage for the bank, as it was never offered again.

    Over the following ten years, I had two successive five-year variable rate mortgages with ING/Tangerine, paying as low as 1.45% and as high as 3.2%. It’s fair to say that I paid the lowest interest rates in the past 60 years. (Were variable rate mortgages even available in the early 1950’s?)

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