Mortgage Options – Which Would You Choose?

Better Than The Other?

Which is better – a Variable or Fixed Term Mortgage? I asked Rob Regan Pollock, a Senior Mortgage expert at Invis – Team Rob Regan-Pollock to provide some answers to this perennial question.

From Rob’s Desk

Some advisors perpetually advocate variable rate mortgages yet, 70% of Canadians select fixed rates as security against rising rates and level payments. What about the other 30%? Does a variable rate mortgage offer something better? Let’s have a look at the inner workings of both variable and fixed term mortgages.

A Financing Perspective – 4 Cost Drivers

  1. Interest Rate –

    On Approved Credit (OAC), variable rate mortgages rates currently range from 2.45% – 2.60%. The rate variance depends on whether the mortgage is conventional or insured, your credit score, the rate hold period, and if the mortgage is considered “no frills” and/or has stiff penalties to exit. When compared to a 3.34% – 3.59% interest rate range for a 5 year fixed rate mortgage, there is roughly a 1% difference between fixed and variable rate mortgages at this time.

  2. Compounding Period –

    The difference between a Variable Rate Mortgage (VRM) and an Adjustable Rate Mortgage (ARM) is that most variable rate mortgages have a fixed payment during the term with the amount of principal and interest changing as the Prime Rate fluctuates. Variable rate mortgages are usually compounded monthly (12 times per year). Adjustable rate mortgages are compounded semi-annually (2 times per year), with payments that move up or down as the Prime Rate changes. The more frequently interest is compounded (added to principal), the greater the cost and the longer it takes to pay off. At a 5% interest rate, the difference between semi-annual versus monthly compounding is 0.05% per year ($50 more per year per $100,000 of mortgage).

  3. car climbing money
  4. Fees –

    Fees are designed to boost the yield of the lender. It pays to review the fine print. Know what fees you’ll charged by with one lender compared to another for any administrative changes during the term of the mortgage.

  5. Penalties to Exit –

    This is where most VRM/ARM mortgages offer a distinct advantage over fixed rates. Fixed rate mortgages always charge the greater of 3 months interest or Interest Rate Differential (IRD). IRD is easiest when explained as the loss of interest to maturity based on the lender’s cost of funds. A lender’s cost of funds is usually the discount you received from the lenders posted rate applied to the posted rate closest to your remaining term. For example, if you received a 2.15% discount from the Bank’s posted rate to achieve a 5 year discounted rate of 3.6%, the Bank will apply the same 2.15% discount from their posted rate for the time you have remaining in your term when calculating your exit penalty.

Example:

If you have 2 years remaining in your term, the bank will deduct your original 2.15% discount from their 2 year posted rate of 3.14% which is 0.99%. The IRD will be the difference between your mortgage rate of 3.60% minus 0.99% (cost of funds) multiplied by the 2 years remaining (3.6% minus .99% = 2.61% x 2 years). In this example, a $300,000 mortgage would have an IRD penalty of $15,660! Most VRM / ARM mortgages would charge a 3 month interest penalty on the outstanding balance. The penalty on the same $300,000 mortgage with a P-.25% VRM obtained 3 years ago would be $2,062.50 ((2.75% x $300,000)/12) x 3 = $2,062.50.

Worry

Canadian Dollar House

With cost factors favoring variable rates, Canadians still worry about rising rates and affordability. As such, most borrowers shy away from VRM / ARM offerings. Thanks to the new B-20 Conventional lending guidelines introduced last fall, the “Benchmark Qualifying Rate” established by the Bank of Canada is now a mandatory stress test for borrowers thinking of a VRM / ARM mortgage? Despite available rates of 2.45% – 2.60% OAC, Federally Regulated Financial Institutions must qualify borrowers who choose a variable or adjustable rate mortgage at the Bank of Canada “Benchmark Rate” of 5.34%. The government insists that mortgage payments remain within debt to income ratios at more than double the current rates.

Need to Know

Regardless of stress testing, borrowers want to know how a VRM / ARM compares to a fixed rate from a cost perspective if interest rates rise by 2% in 2015 & 2016? In order to make this an ‘Apples to Apples’ comparison, we need to compare fixed and variable mortgages with the same monthly payment. How does the annual outstanding balance of a $350,000 mortgage with a 5 year fixed rate of 3.50%, 25 Year Amortization, Semi-annual compounding, and monthly payments of $1,747 compare to a Variable Rate Mortgage of 2.50% with a 0.25% increase every quarter starting in March of 2015?

Comparison Table

Outstanding Balance Fixed Variable
Year 1 $341,051 $337,595
Year 2 $331,785 $325,693
Year 3 $322,193 $316,538
Year 4 $312,262 $309,405
Year 5 $301,980 $302,081

Future Assumptions

Assuming consecutive quarterly increases of 0.25% in 2015 / 16, and a 5% Prime Rate by the end of 2016, the tale of the tape is virtually a dead heat after 5 years. With tame inflation and no significant interest rate risks on the horizon, a VRM / ARM strategy could be a great tool for the right borrower. With consumer debt levels at a record high in Canada, increases in Prime will have more of an impact than in the past. Economists agree this may limit the amount of increases and how quickly the Bank of Canada can raise the Prime Rate moving forward. Consumer debt levels will magnify the effectiveness of each increase.

Chart and Compass [640x480]

Planning

When it comes to mortgage planning, each client situation is unique with both fixed and variable rates needing to be considered. With a 0.75% increase in fixed rates this year, VRM / ARM are worth considering given the qualification stress test, and consideration of future increases in Prime. The key to a VRM / ARM as being a winning strategy, is making sure mortgage payments are based on the 5 year fixed rate as noted in the above example. If a borrower can afford to make even higher payments, or Prime doesn’t increase by 2% in 2015 / 16, the variable rate option is a clear winner!

Downside

The downside, and there is always a downside, is that Prime for a number of unforeseen reasons could increase by more than 2% in 2015/2016. As the Prime Rate is a lagging economic indicator, by the time a borrower realizes their variable rate is heading higher than expected, locking in ( while still possible ), would be done at a significantly higher fixed rate. Fixed rates are based on the bond market, a leading indicator. This is precisely why fixed rates increased by 0.75% this year while variable rates remain unchanged. At the end of a day, the choice of a variable rate needs to balanced against a borrowers interest rate risk tolerance and unique circumstances.

About Rob Regan-Pollock

Rob Regan-Pollock is an expert in mortgage financing. He became a mortgage broker 20 years ago when the industry was in its infancy. Since then Rob has built his business one client at a time and now has 3,500 happy clients and a team of 8 advisors assisting him. Rob’s love of helping people, economics and numbers makes the mortgage business a natural fit. Rob has been a trusted media commentator on mortgage issues since 2000, regularly providing his insights to print, radio and television journalists. He has served the mortgage industry as a board member on a national and a provincial level since 2006. His specialty is education.

Got questions? You can always find Rob and his team ready to help. Call them at 604.879.2772

‘Mortgage Options’ – by Rob Regan-Pollock

About Larry Yatkowsky

Larry is a recognized real estate expert. A veteran professional, his experienced counsel leads Vancouverites in his west side community to place their trust in a man passionate about his work. Uncompromising ethics bring a balanced approach to realizing your real estate dreams.

When Life Moves You - contact Larry:

*Disclaimer: Statistics Courtesy REBGV. While believed to be accurate they are not guaranteed.
**Numbers provided may vary as they are dynamically posted by the REBGV.

Reader Comments:

Alexcanuck Says:
December 23rd, 2013 at 5:56 am

Could you really not find a mortgage broker who still retains a shred of credibility, rather than one who has been caught red-handed deceiving the public and national media?
http://whispersfromtheedgeoftherainforest.blogspot.ca/2013/03/thursday-post-2-another-media-scandal.html
Yes, back in March Rob Regan-Pollock was featured as an expert in a Financial Post article that had an employee of Rob posing as a happy customer so grateful that he received such excellent advice!

December 23rd, 2013 at 11:09 am

@alexcanuck

You know it helps if you check the facts before you spread the manure.

If you took the time to read the comments on Whisper’s blog you would see that Mr. Regan-Pollock and Mr. Siegle – another broker, clearly responded to the insinuations. Further, if you had the balls and took the time to speak with Mr. Regan-Pollock about your concerns, your opinion might have merit.

Here are some facts for you to digest:

1. The author, Ms. Deveau, though advised by Mr. Regan-Pollock, took it upon herself to omit pertinent details – namely that Mr. Hoegg was associated with Invis – Team Rob Regan-Pollock.

2. The issue was investigated by Sharon Park, Investigator for the Financial Institutions Commission (FICOM) who concluded her investigation with the following comment – “information you and Ms. Deveau provided me is sufficient to close my investigation, with no further action being recommended.”

3. In a letter dated August 14, 2013 from FICOM’s Mr. Nick Parente, Analyst, Compliance and Monitoring, Mortgage Broker Regulation, Mr. Parente clearly states the following in reference to Invis – Team Rob Regan-Pollock:
“Based on the evidence we reviewed, there does not appear to have been a regulatory breach over which the Registrar has authority.”

I know and have trusted Mr. Regan-Pollock for many years. With that trust I have and continue to refer many clients to him. Those clients have delivered to me glowing reports of Mr. Regan-Pollock’s service and attention to detail in managing their specific mortgage requirements.

Contrary to your vain continued attempt to be-smirch a good name by suggesting that Mr. Regan-Pollock is “one who has been caught red-handed deceiving the public and national media” is at its lowest, unverified innuendo.

I will continue to refer clients to Mr. Regan-Pollock and dismiss your comment as nothing more than tawdry bullshit intended to fill some void in your ethernet life.

On that note Mr. Alexcanuck, don’t bring your stink to this blog. Find another pile to shovel.

Alexcanuck Says:
December 24th, 2013 at 11:44 am

So you really feel it’s OK to have an employee represented as a happy customer in a newspaper?
Perhaps not criminal behaviour worthy of sanction by regulatory bodies, but still rather deceitful, no?
If not for some investigative work in the blogosphere, that article would still be there without any acknowledgement of the far-less-than-arms-length relationship between Mr Pollock and Mr Hoegg. I do see that as very misleading at best.

Nonetheless, kudos to you for not just deleting my comment as I expected, and a sincere Merry Christmas to you and yours!

December 24th, 2013 at 1:10 pm

@alexcanuck

“So you really feel it’s OK to have an employee represented as a happy customer in a newspaper?”

NO – I do not!

What I really feel is that you are not getting it.

According to my information there is and was no deceit on the part of Regan-Pollock. He made full disclosure at the time of the interview to the writer. This important point was verified by the governing authorities in their conclusions as noted in the previous response.

“If not for some investigative work in the blogosphere” – you cannot possibly be serious!

Had the so called “investigative work” actually occurred in full measure then it would have determined that the issue is with Ms. Deveau and the Financial Post, not Mr. Regan-Pollock. Whether by oversight, lack of professional ethic, convenience or intent, it is she/they who chose to not disclose the relationship.

To use a well worn phrase ‘the bottom line is to not believe everything you read’.

Alexcanuck Says:
December 24th, 2013 at 2:23 pm

It appears from all that I have been able to find on this matter that Ms Deveau was contracted and paid either by Mr Pollock or directly by the Invis group to get his name featured in a positive light in national media. And she delivered.
Why in the world would he present Mr Hoegg to her as a suitable candidate to be featured as the recipient of his services and advice knowing that, if disclosed, his relationship to Mr Pollock would thoroughly discredit the entire article? When it is known that Mr Hoegg is an active employee of Mr Pollock the article in question fails the smell test.

To believe that Mr Pollock was truly an innocent victim of unethical journalistic behaviour sounds about as credible as Harper denying all knowledge of his personal chief of staff making the payments to Duffy. Or that Clinton “did not have sex with that woman”. (An example from both the right and left side of the political spectrum, just to help show that I do not wear political blinders.) Either he knew and is unethical, or he should have known and is incompetent.
Plausible deniability is a well known concept in both business and politics, and does indeed shield one from legal liability, but that does not make it right.

Mr Pollock may well be a very capable mortgage broker and deliver good service to his clients. That does not, however, mean anything to his status as a “trusted media commentator on mortgage issues” that has been blighted by this affair. He has been exposed as one who will at the very least collude in deceptive marketing practices.

And again, by engaging in this discussion you are definitely improving your personal credibility in my eyes. Kudos!

December 24th, 2013 at 5:10 pm

@Alexcanuck

Financial Post sub-header:

NOTE: This story, originally published March 27, 2013, has been altered to identify Allan Hoegg as a part-time mortgage broker with Invis – Team Rob Regan-Pollack.

Whether the article was paid for or not paid for seems irrelevant to the issue of disclosure. The fact that once the original article was published it was noted by someone. I presume Mr. Regan-Pollock immediately noted a fundamental part of the story had not been included – disclosing that Mr. Hoegg was associated with Invis – Team Rob Regan-Pollock. The why and the how I don’t know but it was and that created a problem.

If that was the case, it is a big ‘ooops’ or, depending on how much you treasure your reputation ‘holy shit!’

Speaking as Mr. Regan-Pollock who upon reading the original article, I can imagine a this thought process:
“I told them about Mr. Hoegg’s association but it got missed, overlooked, not recorded – that’s not right and I need to fix it right now.”

Mr. Regan-Pollock noted the error. Mr. Regan-Pollock ensured the error was corrected.

Without prejudice and to my knowledge Mr. Regan-Pollock’s actions were neither unethical nor is he incompetent. Should he ‘ought to have known’ – absolutely! Mr. Regan-Pollock as a senior mortgage broker knows that disclosure is a must do. Assumed is that upon reading the article Mr. Regan-Pollock immediately knew the missed disclosure was wrong. As a professional he did what professionals do and so, to use your words, “he made it right.” Can’t ask for more than that.

Was there intent? Unlikely. For the majority of us in the Real Estate or Mortgage Broker business the fallout of a bad rap in our respective business practice is simply not worth it.

As my priority today is Holiday Festivities and family time I will conclude this discussion noting that people in every profession suffer from errors made – most are unintentional. Not wanting to throw stones at either party, I believe that is case here.

Nothing and nobody is perfect. Because of that I will crudely state that shit happens. When it does, reasonable, responsible people clean up the mess as best they can and move on. Not seeking further conspiracy I am satisfied that is what happened. In the spirit of the Holiday I hope you are too. Thanks for your input.

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