Rate hikes don’t demand fixed-rate mortgages

If your client is shopping for a mortgage, the choice between a fixed interest rate and a variable one could keep him up at night — especially as the Bank of Canada raises rates. After all, no one wants to be surprised by increasing mortgage payments, as can be the case with a variable-rate mortgage.

LowestRates.ca, a comparison website for financial products, reveals that most Canadians that the site serves opt for variable-rate mortgages. Since January 2014, almost 57% of users have gone variable, compared to about 43% who chose fixed.

The central bank’s rate hikes, however, have apparently changed that behaviour.

The number of Canadians who applied for a fixed-rate mortgage in August saw a substantial spike, with about 59% of users on the website opting for a fixed-rate mortgage over variable.

Changes in variable-rate mortgages cause “some Canadians to overreact and do anything they can to switch to a fixed-rate mortgage,” says Justin Thouin, co-founder and CEO of LowestRates.

“Doing this might buy you peace of mind if the thought of rising interest rates keeps you up at night. But, based on the past 30 years, staying in a variable-rate mortgage is still the right choice in the long run if your goal is to pay as little interest as possible.”

LowestRates offers the following example.

If a client purchases a home for $750,000 (with a down payment of 10% amortized over 25 years), at a five-year, variable rate of 1.95%, he’d have a total monthly mortgage interest payment of $1,096.88 (excluding additional costs such as mortgage insurance, principal payment or property taxes). If the Bank of Canada increases its overnight rate by 25 basis points, that client’s monthly interest payment on the mortgage would be $1,237.50 — an increase of $140.62 per month.

That same client using a fixed rate — the most competitive fixed product on LowestRates.ca last month was 2.63% — would have a total monthly mortgage interest payment of $1,479.38. While that rate can be locked in for five years, the client is still spending $241.88 a month more in interest compared with the variable product even after variable rates go up. That’s $2,902.56 a year in increased costs.

(Note that current rates, such as RBC’s, are higher than cited in the example.)

Housing starts increase

In other housing news, the strong pace of homebuilding continues: Canada Mortgage and Housing Corp. says the annual pace of housing starts in August increased compared with July.

Housing starts came in at a seasonally adjusted annual rate of 223,232 units for August, up from 221,974 in July. The increase came as the seasonally adjusted annual rate of urban starts increased by 0.8% in August to 207,524 units.

The six-month moving average of the monthly seasonally adjusted annual rates of housing starts increased to 219,447 in August compared with 217,339 in July.

August’s housing starts were “modestly above consensus,” says CIBC senior economist Andrew Grantham in a note. Further, the six-month average is now at its highest level since mid-2012.

“Alongside consumer spending, residential investment has been a key surprise for growth this year, and these data suggest that new construction will remain supportive for GDP,” he says.

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