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Summary

(Feb 5, 2021) The key distinguishing factors of fixed & variable mortgages and how to choose whats best for you.

Super Bowl Prediction (nailed it!): 4:20 mark of podcast

Interest Rate Prediction (to be determined): 6:20 mark of podcast

Key Characteristics of fixed rate mortgages…

Current Rate Range (as of Feb 5, 2021): 1.49% to 1.79%
Distinguishing Characteristics:
mortgage break penalties are the greater of 3 months interest or interest rate differential (IRD). And with that being said, your mortgage penalty figure can deviate back and forth throughout the life of your term depending on the prevailing market conditions.
Fixed mortgages can be ported/transferred to another property so as to avoid a break penalty, or to preserve your interest rate (CAUTION: porting your mortgage does not always add up. In fact, in most cases mortgage holders opt out of it due to all the caveats associated with it. But nonetheless, it is certainly an option. Click Here to be redirected to my previous blog on Porting a Mortgage)
fixed rate mortgages are available for various terms (1, 2, 3, 4, 5, 7, 10 year terms)
Can be amortized up to 30 years
Maximum Loan To Value allowance: 95%
interest rate changes can occur at any time without any notice (rate changes are directly correlated with the bond markets)

Key characteristics of variable rate mortgages…

Current Rate Range (as of Feb 5, 2021): 1.45% to 1.65% (Prime – 0.80% to Prime -1%)
Distinguishing Characteristics:
mortgage break penalties are 3 months interest (only a rare few may incorporate the IRD calculation)
most variable rate mortgage are not portable
discounted variable rate mortgages are mostly available for 5 year terms (and sometimes 3 years)
Open variable rate mortgages (no specified tenure/term, no break penalties) are available with most lenders but do not offer the exceptional discounts you would typically associate with closed variable rate mortgages
Can be amortized up to 30 years
Maximum Loan To Value allowance: 95%
Interest rate changes can only occur on specified dates that correlate with the Bank of Canada’s annual schedule for policy interest rate announcements. There are 8 regularly scheduled dates, every year. Here they are for 2021: Jan 20, March 10, April 21, June 9, July 14, Sept 8, Oct 27 and Dec 8. When they occur, interest rate changes have commonly occurred at 0.25% increments.

Key Characteristics of Home Equity Lines of Credit (HELOC)…

Current Rate Range (as of Feb 5, 2021): 2.95% to 3.45% (Prime + 0.50% to Prime + 1%)
Distinguishing Characteristics:
do not have break penalties, you can break the mortgage at any time without any penalty
are not portable
no specified tenure/term, no break penalty
will remain in force as long as you own the property (no expiry/maturity date, automatically renews, indefinitely)
Unlike fixed and variable rate mortgages, HELOCs are interest only readvanceable mortgages. Therefore, they do not have amortizations. You can choose to make interest only payments forever, or can make unlimited lump sum contributions towards the principal without any penalties. Also, just like a personal line of credit, a HELOC is readvanceable and allows you to pay down or draw up the balance as often as you like
Maximum Loan To Value allowance: 65%
Interest rate changes can only occur on specified dates that correlate with the Bank of Canada’s annual schedule for policy interest rate announcements. There are 8 regularly scheduled dates, every year. Here they are for 2021: Jan 20, March 10, April 21, June 9, July 14, Sept 8, Oct 27 and Dec 8. When they occur, interest rate changes have commonly occurred at 0.25% increments.

And finally, if you can’t decide on any one of the above…you can always opt for a Matrix Mortgage. A Matrix Mortgage allows you to customize your mortgage with up to 11 different mortgage products – you can literally have a portion of your mortgage as a 5 year fixed, a 5 year variable rate and a HELOC. A Matrix Mortgage also allows you the flexibility to set specific amortizations, terms and readvanceable principle features.

What are the main driving forces when choosing fixed or variable?

Interest Rate – decide based on current rate environment and near term outlook
Break Penalty Policy – this is often overlooked, but should be given extremely serious consideration. If there is the slightest possibility that you may break your mortgage ahead of its maturity, make sure you are completely aware and informed of how the break penalty is determined for your new mortgage
Where do you see yourself in 5 years – career possibilities, children, marital status, new business venture, etc. Secure a mortgage term with your future plans in mind.

MarkoMusic: (music produced and performed my Marko)