Every
interest rate
move by the
Bank of Canada
triggers the existential mortgage question of whether to go fixed or
variable
, but what if you didn’t have to choose?
Of course, that would require a mindset in Canada that doesn’t exist, as homeowners generally have little to no appetite for splitting their mortgages into, say, 50 per cent variable and 50 per cent fixed.
Diversifying debt is not a discussion that is entertained. You are either all in or all out.
It is the opposite argument people have about their assets, and runs contrary to how we would feel about a public company that had all its debt renewing in the same year.
Most companies would try to ladder their debt. If you had a retirement based on
GICs
, you would ladder those, too. But a mortgage is different.
“They all still offer it, but nobody wants it,” said Ron Butler, a mortgage broker at Butler Mortgage, noting most banks will give the consumer a hybrid mortgage if they want it. Butler said hybrid loans were even less popular than 10-year mortgages, which only about three per cent of home owners choose.
Canadians are so accustomed to a certain way of doing business that, even when the five-year
mortgage rate
dropped to 1.59 per cent in 2021, there was very little interest in a 10-year mortgage at 2.29 per cent, Butler said.
“The reason nobody wants the 10-year is that it is always more expensive,” he said. “The problem with a hybrid mortgage is that you are always half wrong. People take their shot.”
The main issue people are concerned about today is their payment amount, with some focusing on rates, but less and less attention is paid to amortization or the schedule of how long it will take to pay off their debt ultimately.
Those customers from five years ago might be able to secure the same payment, but their current best five-year rate is 3.89 per cent, and their best variable rate on a conventional mortgage is 95 basis points off prime or 3.75 per cent.
Butler remains convinced that another cut to the overnight rate, which directly impacts variable-rate mortgages tied to prime, will drive approximately 35 per cent of people to floating-rate products.
“People want the lowest rate because they want the lowest payment, but they don’t care about the amortization,” said Butler. “They would take a 50-year amortization but they can only get 30.”
Debt is something Canadians are willing to accept if they can push it out into the future. If we are going to have that attitude, it is reasonable to hedge our bets on interest rates.
Moshe Milevsky, a finance professor at Schulich School of Business at York University, has not examined his fixed versus variable survey in five years even though it had become well known for the fact that the variable performed better 88 per cent of the time over about a 50-year period.
“One of the reasons I don’t update the study is because the environment is a lot more complex now,” said Milevsky. “There are a lot more decisions today, and you shouldn’t summarize it with long versus short. That is what was lost in the debate. It is not just an interest rate decision.”
There are key issues, such as whether you might need to renegotiate your mortgage because your home is underwater, he says. “You can’t move.”
Milevsky said people are so focused on the payment that they have no idea they are in a variable-rate mortgage. “They are like, but my payments are fixed,” he said. “Even if a variable rate does better than a fixed rate, it is irrelevant. It has to fit your liabilities.”
If you have a stable job, such as one connected to government, Milevsky said, you can float. You are in a tariff-impacted industry? “Lock it in as long as possible.” That way, you have one less headache, he said.
He said mortgage decisions are now more behavioural and that matters. It is not just mathematical. “People are being deluded into believing a 25 basis point cut means their house is affordable,” Milevsky said.
As for diversifying their debt, the professor said people do that, but not just in their mortgage. A fixed mortgage with a line of credit, which is based on the floating rate, effectively diversifies financial holdings.
“It’s also the archaic way of registering a mortgage and deregistering and releasing it; the paperwork makes these things difficult,” said Milevsky. “Imagine saying he has seven mortgages on his house. People would just say he has debt, not diversifying.”
Allison van Rooijen, vice-president of consumer credit at Meridian Credit Union, said there is still no one-size-fits-all deal when it comes to the right mortgage.
She emphasized that advice needs to be holistic, and your debt can impact your well-being.
The variable-rate option is tempting, she said, but five basis points may not be worth losing sleep over.
“Just like no two borrowers are the same, your advice should never be the same either,” said Rooijen. “Get a lender that is going to get custom solutions and options.”
If you are like most Canadians, the solution will likely be a binary choice between variable and fixed options. Just remember there is a diversified alternative to consider.
• Email: gmarr@postmedia.com
