Fixed rate vs. Variable rate mortgage: Which is better for you in 2019?

In this video we talk about variable
versus fixed mortgage rates in 2019. What are they, what are the pros and cons, and
what’s new in 2019 that you need to know that’s starting right now. Brookfield Residential. a channel where you get the latest
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you don’t miss anything. So today I’m joined by Mujtaba Syed,
Mortgage Specialist with the Bank of Montreal and today we’re gonna talk
about fixed versus variable mortgages in 2019. So Mo, I know we’ve talked about
this before but I always like to update because it’s always different — interest
rates are different, the economies change and so on… so can you go over and review what
is a fixed versus a variable mortgage first and then what are some pros and
cons of each. fixed term, meaning interest rates are
fixed, term is fixed, no changes. you’ll agree to a certain term,
you agree to a certain percentage amount that is not gonna change within your
term. Doesn’t matter if rates go up, rates go down, you are locked in. It would vary, so it could be
that the term is fixed for example for five years, but the rate might vary — it
might go up and down depending on where the economy is Variables are more
dependent on prime rate which is the overnight lending rate to the bank
of Canada will set, then your bank will have a prime rate based on that. So if your
prime rate goes up, your interest rates will go up If your primary goes down your
interest rates will go down and subsequently if your rates go up and
down, your mortgage payments are affected based on that. Your principle
portion might get affected if you’ve not adjusted your payment, because interest
rates have gone up, and now more is going towards interest towards principal, so
you want to kind of stay on top of that. With variable, it is subject to change and it could be maybe not ever in the first five years depending on where
the bank of Canada is or the economy is or it could be changing quite a bit it
could fluctuate maybe on a yearly basis it’s hard to say, but definitely
something that you want to be cognizant about and keep your eye on, which is on the variable rate. So 2019 seems to be a great year.
We’re seeing a lot of movement in rates — more on the fixed side though not
on the on the variable side. Now fixed rates are actually calculated
differently compared to the variable rate. Fixed rates are based on the bond
market. ten year bonds actually trading at a very
very low level. That’s the reason
why we’re seeing quite a bit of a decline in fixed mortgage rates. So I’ll
give you an example, so January of this year we were sitting at rates around
3.49 and as of now we’re seeing rates come down to as low
as 2.69 in some places That is a big difference.
We’re expecting rates to drop further it might even go down a lot lower than
that. seen prime rate change at all. So every
quarter or every couple of months, the bank of Canada will come out and reassess the situation where the economy is heading and see ‘should we adjust our
overnight rate or should we adjust interest rates that kind of combat
inflation or whatever it is.’ As of right now they haven’t decided
to change anything. There are some talks that there might be a decrease by the
end of this year, but once again just speculation, we don’t know. And if you’re
deciding right now you’re buying a home “should I go with fixed? Should I go with
variable?” it also just depends on your scenario and depends on how comfortable
you are with taking risk because there is some risk associated with variable.
You could go with a fixed rate today and decide “hey I’m comfortable with this is
a 2.79, 2.69 rate I would actually go with a fixed rate so it doesn’t bother
you. thinking “wait a minute there’s a
possibility variable rates might go down, but there’s also possibly the fixed
rates might go down even further. In a variable, there is
something built into a variable mortgage that a fixed mortgage doesn’t have. With
the variable mortgage you can lock into a fixed mortgage at any time without any
penalties as long as the term that you’re currently in is the same or
greater. So let me give you an example so you start off with let’s say a 5-year
variable rate. You’ve kept it for one year You have four years remaining on
your term. You could lock in to a four-year mortgage term or five-year
mortgage term or a six year mortgage term Anything higher than what you
currently have at any time without penalties Sometimes I’ve advised my
clients to do that, thinking “hey listen you guys are willing to take a little
bit more risk, go with the variable today” and I did
that around February time and a lot of my clients took my advice and they’re
very happy for it, so we got them into a variable around February time, and
fixed rates at that time were a little bit higher — they were 3.49, and now rates have come down a 2.79 my clients have actually gone and
switched from that variable to I fixed and locked in their rate for 2.79. At that time if they’d taken it it would have been 3.49
so it’d have been a little bit higher so depending on your scenario, depending on
how comfortable you are with taking a risk, all our conversations you need to
have with your lender but a very important conversation to have,
because it could totally change your mortgage payment, it could change
budgeting, going between a fixed or variable rate there’s pros and cons to
both. As of right now I would kind of have the conversation with your lender
but we’re going through a very exciting time where rates are actually coming down. We
had a little bit of a scare last year where it’s had gone up as high as 3.69, so it’s really good to kind of feel like we’re not in that
environment. We’re going into a lower rate environment perfect time to either
renew your mortgage or to purchase a home so when we talk about terms like in
this market is it better to have a five-year a ten-year term… is there anything
more than 10 years in terms? some US markets I’ve heard as far as thirty-year
terms or a higher. We don’t have that here in Canada, the most I’ve heard is
a ten-year term. So the question you want to ask yourself is that are you
comfortable being with Bank A or your lender for ten-year period? Like you can
get out sooner if you do you’ll incur some penalties to break out of a
contract. You’re getting into a legal contract with your lender for that term
amount — it could be a ten year term, it could be a five year term, but you’re
stuck with that lender for that long and that means that rate is locked in for
that long as well. But let’s say you have long term goals. You feel like you’re not
going anywhere in ten years and you feel like the ten year rate today is very… I
would say very comfortable and you don’t want to you don’t want to take a risk
for coming up for a new one in five years, a ten year rate would be a really
good option. Right now they’re trading at a pretty decent rates, they’re discounted
quite a bit. You could get yourself a ten year rate and not have to worry about it
for ten years at all. Get your budgeting in line for ten years and just focus on
paying it off. That would be a really good strategy, but depends on what your
specific strategy is. Now it doesn’t work for everybody.
It might work just for you so once again sit down, have a conversation
with your lender, have a conversation with your bank. Find out what kind of
goals that you have and decide from there. But maybe shorter maybe longer
depends more on your scenario. Do you need to keep doing a stress
test every year, or is it only just within that term When you’re first
buying your home that is when the stress test happens. It
doesn’t happen at renewal time either but does a stress test apply for
different terms? It definitely could. So at the time of purchase you
want to go with the ten-year term and let’s say the ten year rate is like 4%, so it would be two on top of that So you could be four plus two which
is six which is considerably higher than the bank of Canada posted rate of 5.34. So stress test is 2% over your posted rate, or the bank of Canada’s
is posted rate, whichever is greater so do keep that in mind if you want to go
for a longer term rates are gonna be higher. You might have a higher stress
test, it might have a higher qualifying rate to qualify on than let’s
say a 5 year term or a 2 year term or a 3 year term. As
long as the qualifying rate plus two is less than the bank of Canada’s posted rate of
5.34, you won’t have anything to worry about.
But if it’s going higher than that then that stress test will apply to you. Perfect. Do you have anything else to add? I think the best thing to do right now
like I said — very exciting time, rates are coming down, we’re going through a lower rate
environment — is definitely do your research, see where rates are best for
you, ask us questions. Definitely leave questions below and we’ll get back to you as soon as we can What’d you think variable
and fix is good we can definitely get you in touch with the right sorry steer
you into the right direction say hey maybe based on your certain criteria and
your lifestyle maybe consider going with the fix or
going with the variable. It’s a good
conversation to have with yourself and with your lender. So the question of the
day I have for you is: Did you choose a fixed versus variable in your last
mortgage, and why? Or if you’re planning to buy a house in the future, are you
planning to go with a fixed or variable and why as well? Let us know in the
comment section below. So if you want to know more about mortgage rates, we’ve
got a great video series here, as well as a step-by-step on how to get a mortgage,
which you can see in video series here Don’t forget to subscribe to
keep learning from the experts and I’ll see you in our next video

1 thought on “Fixed rate vs. Variable rate mortgage: Which is better for you in 2019?

  • Did you choose a fixed versus variable in your last mortgage, and why? Or if you're planning to buy a house in the future, are you planning to go with a fixed or variable, and why as well?

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