Should you lock in your variable rate?

Today we’re going to talk about variable rate mortgages & whether you should lock in. Earlier this week I put out a blog which dove into fixed versus variable & outlined some of the key factors which could impact rates one way or another. We also looked at what history suggests is the best strategy, so for anyone who wants to take a bigger bite out of this, I’ll link to that in the show notes below but this video is going to build off that & give some practical questions to ask yourself if you’re debating whether to lock in your variable.

When ppl talk about fixed vs variable, you’ll often hear them saying a fixed rate mortgage is for the risk averse, as you know exactly what your payments are going to be for the length of your term. In reality, though, the biggest downside of a fixed rate mortgage is the penalty. If you break the term, which happens to the vast majority of borrowers, there is a penalty attached & on the fixed rate side the penalties have the potential to be much much much higher than with a variable. Given that most ppl end up breaking their term & paying that penalty, taking a fixed rate comes with more downside risk than a variable & when you consider that the variable has outperformed the longer term fixed rates close to 90% of the time, the variable actually seems to have much less risk than a fixed. If you’re in a variable currently, keep this in mind. The decision of whether to lock in should weight the probability of potentially breaking the mortgage just as heavily, if not more heavily, than concerns of rising rates.

Moving on, if you’re 10000% certain you will not be breaking your mortgage & therefore are not concerned with penalty risk, the question of locking in really boils down to your own piece of mind. If talk of rates rising keeps you up at night, or if your budget is tight & increases to your payment are going to but strain on your finances, then the first thing you want to do is contact your lender & ask what your options are to lock in. Compare the difference in payment & see what your buffer is – how many Bank of Canada increases would it take before that variable catches up to the fixed? If one increase is going to bring you to par, then that decision is going to be easier than if it would take 3 increases. Compare the risk & reward. Think of it as an insurance policy against rates really taking off.

With all this said, I’d like to again point out that history suggest locking in a variable isn’t a great idea from an overall cost of mortgage perspective. You’re better off just riding it out. For more info on that, again I’d recommend reading the blog I put out earlier this week, or feel free to give me a shout.

Ryan Zupan
Mortgage Planner
DLC City Wide Mortgage Services

Should you lock in your variable rate mortgage?

The past 8 months have seen the most rate increases by the Bank of Canada in over a decade.

Amidst worries of inflation finally starting to creep in with our American neighbors, and concerns that, after 35 years of declining rates, this long term declining rate trend may finally be reversing, the question of whether to lock in that variable rate that has done so well for borrowers has become a valid concern. In this blog we’re going to give some perspective to these rate increases, outline reasons for & against future increases & discuss the questions you should ask if considering locking in your own mortgage.

We are currently just off the basement of a multi decade long term trend of declining interest rates, which began in 1981 when prime rate dropped from its high of 21.25%. Since then, the overall course has been down & we have hit historical lows for interest rates in what has been an unprecedented experiment in central bank policy. In fact, over the 5000 years of interest history, the world is at the lowest level ever recorded. From that perspective, one would assume we’re closer to the end of this long term cycle than the beginning, but the question is what is going to happen in the near term.

Central bankers use interest rates as the levers of the economy

– lowering rates incent borrowing which leads to spending & investment, while raising rates are used to slow the economy & reel in inflation. While Canada had a far better year than expected in 2017, we are facing some major headwinds to overcome in the year ahead. For one, rising rates slows housing, which has been a big driver of the economy to this point. Higher rates can also strengthen the loonie, which negatively impacts exports & therefor manufacturing.

There is also the overall indebtedness of Canada to consider. Too many rate increases too quickly can effect repayment of loans & put Canadians under water on their debts. Additionally, NAFTA renegotiation & the lowering of the corporate tax rate in the States (making Canada less competitive) are two other pressing concerns for our economy. Overall, there is anything but an assured path to aggressive tightening of interest rates in the short term.

To get a sense for where rates might be heading, we can look to the yield curve.

The yield curve plots short to long dated government bond yields (interest rates are priced off of these bond yields). A normal shaped yield curve is upward sloped & indicates investors expect longer maturity bond yields to be even higher in the future. Despite the short term yields rising roughly 1% over the last year in Canada, long dated bond yields have barely moved. The yield curve is still relatively flat, which suggests investors are not optimistic for long term growth & therefore skeptic to see higher interest rates.

The best research on fixed versus variable has come from York University professor Dr Moshe Milevsky. He found that borrowers were better off taking a variable rate over a longer term fixed rate nearly 90% of the time. Fixed rate borrowers pay for stability, while those with a higher risk tolerance, who can handle fluctuations to their payments, would benefit from that uncertainty by paying less interest. Years later he updated his study to determine if borrowers would be better off trying to time the market & lock in their variable mid-term. Even under the generous & unrealistic assumption that borrowers would be able to accurately forecast the future of interest rates, he found that individuals who attempted to lock in & time the market underperformed (83.3%) those who stuck with the variable (88.1%) & rode out their term.

Accurately predicting interest rates is one of the hardest things to do in all of finance.

You could be right in timing the bottom of this 36 year trend within 5% & still be off by 22 months. Given that fixed rates are priced off bond yields, and that the bond market has generally priced in increases by the Bank of Canada before they have happened (meaning fixed rates will go up before you’ll hear talk of prime rate increasing), don’t bother trying to time the market. Take a fixed term mortgage & sleep easy knowing exactly what your payments will be for the coming term, or take the variable & don’t worry about the impossible task of trying to time the market. Choose a path & stick with it.

Why Using A Mortgage Broker Is More Important Now Than Ever Before

The mortgage industry has completely changed in the last 2 months.  With the last round of rule changes, we have now entered a new galaxy of complexity in our industry, where lenders all price their mortgages differently depending on the client, the property & the type of financing requested.  It has never been more important for consumers to do their due diligence when shopping for a mortgage.

Before, if a borrower really wanted to do everything on their own & shop lenders themselves, they could.  It would require a ton of work – completing many applications, setting up lots of meetings with mortgage specialists, and hours of online research – but for the motivated borrower, it was possible to become a well-informed consumer without drawing on a broker’s service (which is free, by the way).  Now?  Good luck!

Let me explain: the aftermath of the mortgage rule changes last fall has left every lender with not only drastically different policies than the next, but greatly varying criteria of what types of mortgages they offer & at what rate they will offer them.  Even within a single lender’s range of options, the pricing now varies depending on the down payment size (less than 20%?  20%- 25% down?  Or greater than 25% down? Greater than 35% down?), amortization & property price.

Many lenders now flat out will only do purchase & not refinances.  Some will only do purchases for borrowers who pay for mortgage insurance.  Many have eliminated niche programs such as rental purchases or have stopped funding mortgages on properties priced at $1m or higher.  It has gotten to the point where brokers, the experts, will have a difficult time knowing what options are available to a client without reviewing their application & studying the matrix of lender policies & pricing nuances.

My point with all this is that it is more important now than ever before to use a mortgage broker.  Not only that, but a broker with the experience & size of business to guide you in the best way possible, utilizing the widest range of lenders.  Use the experts.  If you love how your bank greets you when you walk in & have been with them for 30 years?  Great, but understand that they are only 1 option out of 20+ national lenders, not to mention the local institutions.  With every bank & nonbank lender sporting drastically different options than the next, there is a very small chance you are getting the best product only speaking with your bank.

The best value you can ask for is someone well versed in the field to help you navigate the wide range of options.  Call a broker.  Use the expert.


Top 5 Mistakes That Delay the Mortgage Process

There are a lot of moving parts when you buy a home. Before you start looking with your realtor, you have to get a price range & pre-approval sorted out with your mortgage broker. Then once that’s all sorted & you’ve found a home, your money needs to be freed up & ready for the deposit, so you might need to speak with your financial adviser or tax adviser, or your family members if any of that down payment money is coming as a gift. Then, before closing you need to sort out your life insurance & your home insurance, and in the midst of getting ready for & coordinating that big move, you have to go in to see your lawyer/notary to sign a small tree’s worth of documents at some point before closing.

The last thing you need on your plate is any hiccups in the mortgage process. Here are the 5 most common mistakes that delay the mortgage process:


  1. Not sharing changes to the offer price with your lender

If issues come up in the home inspection that the seller drops the purchase price to account for, you need to let your lender know right away. Depending on what the issue is, the lender may need to have it rectified prior to you taking possession. If the bank doesn’t find out about this until they get a copy of the purchase contract from your lawyer a few days before possession, you could put yourself in a real pinch with only a short time until closing.


  1. Confusing approval with pre-approval

Nowadays, a pre-approval really just gives you a rate hold & a price range. Lenders don’t fully underwrite pre-approval submissions so it’s vital that you get an approval in writing prior to you removing your financing condition & committing to buy the property. Banks need to look at the whole picture, which includes your financial details AND the property details.


  1. Not disclosing where your down payment money is coming from

If a portion of your down payment is coming from a family member, or from a line of credit, let your mortgage broker know early on. It’s not uncommon for a client to say down payment is coming from their resources & then we find out that isn’t the case once we start collecting down payment documentation. Lenders want to know about this up front otherwise they will have to go back & get the file re-approved. In some cases, this could even put your approval in jeopardy.


  1. Not sharing details of your income or employment

If you recently changed your compensation plan (from salary to commission, or vice versa) or plan to change your employment, tell us right away. Lenders have the right to call your employer at any time before closing to verify your employment details & if something like that comes up late in the game, again, it can jeopardize your approval.


  1. Not providing all the required documentation

When you get a mortgage, the lender will need to see confirmation of certain details in your application (income, down payment, debts, etc). When I pre-approve my clients, they get a list of what documents will be required for mortgage approval. To make the transaction as smooth as possible, send those in right away. If the lender can get all of those documents up front, you can take a lot of stress & scrambling out of the picture.


Buying a come can be stressful enough. The last thing you need is fuel to that fire so make sure you are upfront with your team of professionals & on the ball in terms of getting them what they need early on.

If you would like to know more about how to ensure a smooth home buying process, contact me at [email protected].


Is it worth waiting to save 20% down? Pay the insurance premium or wait?

Hi, Ryan Zupan here with the Mortgage Centre City Wide. Last week, we talked about mortgage insurance, what it is & what the premiums are, and this week we’re going to talk about whether it’s worth buying today, paying the premium, or waiting until you have a 20% down payment & avoid the premium all together.

Let’s look at this example. Let’s say you want to buy a $400K condo &, right now, you have 5% saved for a down payment – $20K. The CMHC premium in this case is $10,450. To avoid paying that, you will need $60K MORE than you have right now. I’m going to need $80,000 for a 20% down payment. Ask yourself, how long will it take you to save that $60K? 4 years? 5 years? Maybe longer? How much higher do you expect property values to have increased by that time? More than that $10K? Is it worth waiting?

Let’s say you are able to save $12K / year & it would take you 5 years to save the 20% down payment. If you went ahead & bought today with 5% down, paid that premium, then just applied that $12K per year as a lump-sum on your mortgage, not only will you pay off that premium in a year’s time, but, compared to buying with 20% down, after your 5 year term, you will have a lower outstanding balance, a lower payment & be 5 years closer to paying off your 25 year mortgage than you would waiting. All this AND you get to buy a home today, for today’s prices, with interest rates still much lower than they’ll likely be in 5 years & avoid paying rent for the next 5 years.

If you’d like more information on the insurance premiums, or you’d like me to calculate how much the premiums are going to cost you – is it worth you buying today or is it worth waiting – contact me, I’m Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner
[email protected]

Tax Tips: How Prepayments Save Your After Tax Dollars

Alright, so it is everyone’s favorite time of year, Tax Season!  Now, if you’re like me, you enjoy paying taxes as much as you enjoy finding an empty toilet paper roll in a public washroom.  They’re both revolting.  But in my effort to symbolically “spare a square,” I’m going to share some insight into how making prepayments on your mortgage are related to income tax.

Keep in mind, I’m a Mortgage professional & not a tax expert, but there are some very basic truisms I’d like to share:
Unlike the States, mortgage interest in Canada is not tax-deductible.  The monthly payments you make are with your after-tax income — what I mean is, the payments are with money you’ve earned & already paid tax on.  This makes it even more important to make prepayments on your mortgage early, as you will not only save dramatically on you long-term interest costs, but you’ll save from having to apply future after-tax dollars to your mortgage payments.

If you have a mortgage interest rate of 5%, for every $1000 of principle you reduce your debt by, you will save $50 in after tax cash each year.  Looking at it this way, in an income tax bracket of, say, 40%, you need to earn $83.33 to pay the interest for every $1000 of outstanding principle so there is a huge benefit to reducing this balance.

Any prepayments — whether it’s lump-sum, doubling up payments, increasing payments, anything above your required monthly commitment — are going directly to reducing your outstanding balance.  You wont’t have to pay interest down the road on that amount so you are saving your future, after tax dollars.

You could also think of this as your return on investment for making prepayments is 8.33% before tax & 5% after tax, which is better than most fixed return investments — bonds, GICs, etc.

So make lump-sum payments, double up payments when you can, use your RRSP-driven tax rebate to pay down your mortgage, you’ll not only save tremendous amounts of interest, but you’ll save from having to apply future after-tax dollars to your mortgage.

For more information on mortgage tax strategies, or learn how you should be using your prepayment privileges, contact me, I’m Ryan @ City Wide Financial.

Ryan Zupan
Mortgage Planner
[email protected]

The Biggest Threat to Today’s Homeowners & How to Protect Your Mortgage: Inflation Hedge Mortgage Strategy

Ryan Zupan here with City Wide Financial, I want to talk about a strategy that we’ve been using with just about all of our clients over the past few months. It’s called the Inflation Hedge strategy.

The biggest problem I see right now is that, b/c interest rates have been at historical lows for the past 3 years, there has been an influx of buyers entering the market who, when rates return to a more normal level, a higher level, they’re going to be in a lot of trouble. All of a sudden, from one month to the next, their mortgage payment is going to rocket up by $5-6-700 when their mortgage is up for renewal.

Now, some ppl say, well, in 5 years I’ll be making a lot more money so that won’t be a problem but as we all know, the more money we make, the more we spend & the more expenses we’ll have. You really don’t want to be a situation where you have that payment shock.

So this strategy is designed to prepare your mortgage for the higher rates of the future & eliminate that payment shock. How do you protect a mortgage from this type of inflation? What do we do that eliminates this shock?

There are a few key values that factor into this strategy. First, we calculate what your outstanding balance will be at the end of your term, then based on where we expect interest rates to be at that time & what we expect your payment to be, we determine what steps we need to take to get your mortgage payment to that level.

In a nutshell, the inflation hedge strategy adjusts your mortgage marginally each year to account for updates to interest rate forecasts. Because these marginal payment adjustments result in you paying down more principle, you’re going to save thousands in unpaid interest costs.

The results of the inflation hedge can be tremendous. The savings range from as low as a few thousand up to $15-$20K and all this is by doing very little.
The beauty of this strategy is that you can start it at any point in your mortgage so if you already own but want to find better ways to manage your debt or if you know of friends or family that may benefit from this very simple, yet effective strategy, contact Ryan @ City Wide Financial.

Ryan Zupan
Mortgage Planner
[email protected]

How to best take advantage of today’s low variable rate?

Ryan here with City Wide Financial, talking about what is an adjustable rate mortgage strategy.  This is one of the more common questions we’re asked – fixed or variable, which is better?

If you are asking yourself this question, a strategy I encourage you to think about is taking an adjustable rate, but fixing your payments at what they would be at the higher, fixed rate level.  If you’re considering taking a fixed rate, you can obviously handle that payment, so why not fix your payment at that level & pay down boatloads of principle while the variable rate is so low.

A good variable rate is around 2.25%, about 2% below today’s best fixed rates.  On a $300,000 mortgage over 30 years, your variable rate payment is over $300 lower than the fixed payment.  So if you take the variable rate & fix your payments at the fixed rate level, in year 1 you’ll pay down $4000 in more principle than you would normally.

Now, of course, the variable rate fluctuates & as it increases, the savings won’t be as significant but my goal here is to illustrate the kind of savings you’ll see.  Also, eventually that fixed payment likely won’t be enough to cover your variable payment, so at that time you’ll need to fine tune your strategy, but that is why you need someone committed to managing this mortgage for you.  Taking a variable rate opens your mortgage up to a lot more risk & anyone thinking of taking a variable rate with their bank is crazy because they do nothing to manage your mortgage over the term.

A lot can happen in 5 years time, particularly in the mortgage world, is money, so it’s important to have someone advising you throughout the life of your mortgage, making sure you’re saving as much money as possible.

If you’d like to hear about more of my mortgage strategies, or to see how much you can save by taking the adjustable rate strategy, contact Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner
[email protected]

How To Take 5 Years Off Your Mortgage.

Ryan here with City Wide Financial, talking about accelerated payments & why every mortgage holder should be using them.

Mortgages are a lot like having a bratty teenager: the more attention you give them, the less money they’ll cost you. Mortgages respond very well when there is someone actively engaged in managing them. Whether that’s me, whether that’s you, part of giving your mortgage more attention is making payments more frequent than regular monthly. Accelerated payments are either semi-monthly, bi-weekly or weekly. They have the effect of paying off your mortgage up to 5 years ahead of schedule. If you’re taking a 30 year mortgage, choosing accelerated payments are almost the same as choosing a 25 year mortgage – big savings for doing very little.

So what are they? Well with bi-weekly, for example, we take your monthly payment, cut it in half & arrange for you to make that payment every 2 weeks. Now, because there are 52 weeks in a year, that’s 26 bi-weekly payments, which is the same as 13 monthly payments. So, accelerated bi-weekly payments effectively squeeze in an extra month of payments into the calendar year.

If you have a $300,000 mortgage over 30 years at 5%, accelerated bi-weekly payments will pay off the mortgage in 25 years & 3 months, nearly 5 years earlier. Not only that, but you’ll pay off nearly $10,000 more principle & save over $50,000 in unpaid interest. Big savings.

Everyone’s mortgage should be on accelerated payments. We can match the mortgage to coincide with your paydays If you’re paid semi-monthly & don’t want the confusion of paying every 2 weeks, contact me & I’ll explain how we work around that. Otherwise, that will be a topic of a later blog.

If you, any friends or family would like to know how much accelerated payments could save you, contact me, I’m Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner
[email protected]