I was enjoying my morning coffee at a local Starbucks when I came across the London Free Press' Business section with the headline, BoC hikes Interest Rates (read the story here). The story was a typical reporting about what happened with interest rates and where we may be headed.
However, I was absolutely shocked at the graphic in the middle of the story about comparing mortgage rates that claimed to have analyzed that a variable rate mortgage will save you $23,151 over 5 years when compared to a fixed rate mortgage. The rates used were 1.75% for the variable and 4.59% for the fixed rate.
What is shocking is that 1.75% is non existent as a variable rate discount because The Bank of Canada raised the benchmark rate by 0.25% which means that the variable rate about which the reporter was writing is actually priced at 2%. What makes this graphic even more disturbing is that the reporter made the assumption that 1.75% would stay the same for the entire 5 year term! This type of calculation should be outlawed in the mortgage industry!
How can one claim to save money on a variable rate mortgage when rates are NEVER guaranteed to stay the same AND we are in a rising interest rate environment?
So then, am I suggesting that variable is not a good choice?
Absolutely not! Variable can still work out in the long run by approximately $11,000 in interest savings IF YOU factor in a 1% rate increase each year for the 5 year term.
Banks, on the other hand, will almost always follow what the media says and give you advice based on that. Both banks and the media tend to "fear monger". Right now, some banks are saying to customers, "Lock in because rates are going up!" How do I know this? I have been mystery shopping the banks recently and all of their supposed mortgage specialists seem to be confused and incapable of anaylzing the calculations of choosing variable or fixed. On top of that, the truth is that rates have already gone up and the profit on the bond spreads are at record highs, meaning that the more people lock in their mortgage rate, the more profit your bank makes!
Any "specialist" pushing you into one option versus the other is most likely taking the easy way out! True professionals will help you analyze both options and articulate the costs of those decisions.
My last piece of advice is to avoid the media for financial advice and talk to a few different professionals about monetary policy and interest rates!
Thanks for reading!
Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671