Weekend Reading – Mortgage renewals

Weekend Reading – Mortgage renewals – including is fixed- or variable-rate better?

Hey Folks!

Welcome to a new Weekend Reading edition about mortgage renewals and whether it’s best to go with a fixed- or variable-rate mortgage. 

Before some of my thoughts and experiences on that…

I posted this recent April 2023 dividend income update, sharing some higher income momentum!

A thanks goes out to Rob Carrick for mentioning my post in his recent Globe and Mail newsletter related to owning international stocks, meaning I think we should all own some.

Last weekend, I wondered if stagflation is coming to our economy and outlined my reasons why it could happen:

Weekend Reading – Is Stagflation on the way?

Weekend Reading – Mortgage renewals, is fixed- or variable-rate better?

Source: Pexels, not my condo, ours is a bit larger. 🙂

To be honest, I hope to avoid this decision in the near future (more on that in a bit) but for many Canadians, myself included in the past, it’s a major question to ask yourself and answer.

When it comes to mortgage renewals, is going with a fixed-rate or variable-rate mortgage better?

Let’s dig in…

Each time your mortgage comes up for renewal, at least when it did for me/us, I know there are a few decisions to make:

• Should you stay with your current lender for ease of mortgage management?
• What mortgage term should you buy?
• Any particular terms and conditions you should consider?

Here is my position on a few things:

1. Should you stay with your current lender for ease of mortgage management? Generally speaking: don’t. 

I personally feel there is a huge world of mortgage options and lenders now available to borrowers these days, so don’t be automatically compelled to stay with your current financial lender at time of mortgage renewal. Instead, tip number one: shop around. Use great sites like Ratehub and RateSpy in particular (no affiliations) to figure out who can offer you the best deals with terms and conditions you will use. 

Beyond that, tip number two: engage with a trusted mortgage broker. They work for you.

I’ve used a few mortgage brokers over the years for these key reasons:

• To obtain unbiased feedback. When discussing our financial situation, there was always a “here’s what you could do” or “you could consider this”. No obligation feedback and suggestions. I liked that. 
• To obtain negotiation leverage/power. The way I see it, using a mortgage broker, you’re going to get more attention because the lender wants that broker to continue sending business their way. As an individual customer, we’re just a number at any major financial institution. 
• To save more money. No doubt mortgage brokers are compensated by the lenders they strike the deal with but a) that means you don’t pay them and b) as long as the rate and conditions of the mortgage are better than what you could have obtained – you’re saving money. 

Don’t start any mortgage renewal paperwork process before you shop around, determine your essential terms and conditions, and engage with a mortgage broker to see how they can support you. 

2. Should you consider fixed or variable and beyond that, what length of mortgage term should you obtain?

I would say if recent interest rate hikes are giving you sticker shock now then this could be a trigger to go fixed and avoid any future mortgage-payment heart palpitations.

Here are some terms within the terms as shop:

• Fixed vs. Variable – a fixed rate doesn’t change, while a variable rate might be a good option if you think rates will go down in the future – and you’re comfortable with the risk that they could go up too.
• High Ratio vs. Conventional – high-ratio is if the loan-to-value is above 80%, which will require you to pay for mortgage insurance, but it may offer lower interest rates than conventional mortgages.
• Insurable vs. Uninsurable – some mortgages are uninsurable, such as if the property value is over $1 million, if the mortgage has an amortization over 25 years, or if you don’t meet credit score requirements. Being uninsurable can increase your interest rates.

Personally, my wife and I have done both over the years: owned fixed- and variable-rate mortgages.

In the early 2010s we had a variable-rate mortgage while interest rates were sustained at very low levels. With some good timing on our part (since we wanted the stability of financial payments as we entered the final years of our mortgage balance), we signed a four-year fixed-rate deal before the pandemic hit for what we believe is our final fixed-rate mortgage at 1.69%. We hope to have that mortgage paid off in another 11-12 months and be mortgage free as we consider entering semi-retirement sometime in 2024. 

With fixed rates hovering usually higher than variable rates, a reminder you’ll pay a piece-of-mind premium for that at times. A variable-rate mortgage, on the other hand, fluctuates based on movements in the Bank of Canada’s overnight rate. Depending on the details of your mortgage contract, those fluctuations will lead to changes either in your mortgage payment amounts, or your amortization period. Either way, rate changes on a variable mortgage affect how much interest you pay in the long run.

While any fixed- or variable-rate decision is highly personal, I believe like most personal finance decisions your answer will boil down to your risk tolerance and spending behaviour. If you can stomach higher rates, and maintain your standard of living, then go for variable and a shorter-term, say 3-years or so. This means I would suggest all borrowers factor in lifestyle decisions such as food/groceries, cars, various family expenses, etc. and make a decision from there. If you cannot stomach nor financially survive any borrowing costs higher than some fixed rate obligations today, well, going with a fixed rate is your answer. Simple.

3. Any particular terms and conditions you should be mindful of?

You bet. 

On the subject of fixed or variable, I didn’t mention yet the need to break your mortgage. If you think you might need to break your contract mid-term for any reason, variable is almost always the better way to go since there are different formulas for calculating breaking any variable- versus fixed-rate mortgage.

From one of my go-to experts on this subject:

On variable mortgages, generally, your penalty is three months of interest – Rob McLister from a Stress Test, episode, The Globe and Mail’s personal finance podcast. Unfortunately for you on the fixed-rate mortgage, your penalty is the greater of three months’ interest or what’s called the interest rate differential (IRD). In some cases, your IRD can be in the thousands of dollars with a fixed-rate mortgage.

Beyond medium-term mortgage commitments (I’ve never had a mortgage rate term longer than 5 years…), I have always had prepayment, double-up payment and other benefits with my mortgage terms and conditions. With some mortgages now, you have the flexibility to divide your mortgage into different terms and rates. This means that you can choose a fixed rate mortgage for one portion of your loan, while taking advantage of favourable interest rates with a variable rate mortgage for the other portion. You can also have those prepayment privileges applied to whatever mortgage component you wish to pay it down faster. Options abound. 

Is it really better to renew with a shorter or longer term? Fixed or Variable?

Meh, “it depends”!

I believe in today’s mortgage space, on this debate, this is my summary for you:

1. …if you feel the need to safeguard yourself in any way for an unknown interest rate future AND
2. …you have no intention of moving or believing you will need to move, then going fixed in a shorter-term mortgage product such as a two- three-year fixed term could work well for you.

Just a reminder that with any fixed-rate mortgage, the downside is you need to think carefully about how you’d react if interest rates were to decrease significantly during your mortgage term. If interest rates are not likely to decrease signficantly, quickly and you would behaviourally appreciate the certainty that comes with your borrowing costs, well, you probably have your decision near-term.

More Weekend Reading…

I found this link from Rob Carrick’s newsletter this week: 

We use the term “millionaire” like it’s grandiose and unattainable. Is it really, though?

I believe a million dollars invested is still A LOT money for many Canadians, especially when you tack on government benefits like CPP and OAS for any retirement or semi-retirement plans.

Still, quite a few Canadians believe they need $1.7 million to retire.

A HUGE number.

That’s a problem for many reasons. 

Canadians Expect to Need $1.7 MILLION to Retire – That’s a Problem!

Need more evidence to become a DIY investor, and invest on your own?

Well, beyond the fact that at least one advisor recently was caught trading inside the Tax Free Savings Account (TFSA) (which is not advised of course, and that comes with steep penalties…) I read the satisfaction that many consumers have with full-service financial advisors continues to plummet. 

From this article:

• “Just more than half of full-service wealth clients have financial plans: Only 57% of full-service wealth management clients say they have a financial plan and, within that group, 43% do not agree that their advisor’s recommendations are in their best interests. Surprisingly, 38% of investors who say they have a plan don’t think their advisor understands their financial goals and needs.
• Younger clients already voting with their feet: Millennials¹ are the most likely to switch firms in the next 12 months and are most likely to already be working with a secondary investment firm. One in five (20%) Millennials say they “definitely will” or “probably will” switch firms, and 33% say they are working with a secondary investment firm.”

I am happy to read that more millennials are voting with their wallets. Others should consider the same. While advisors can definitely add value, and I know some that do, I believe you really, really need to question what value they are providing – like any service.

A reader to my site recently asked:

Hello Mark,

I have been reading you for years with interest. One question related to (one of your last) and many previous topics: when you estimate what amount is necessary to retire with $6,000 (or $7,000 or $5,000) per year, is that after-tax?

Great question, an important one and thanks for your readership. 

In posts like these below, it’s always after-tax spending. Good news I hope for you!

How much do you need to retire on $5,000 per month?

How much do you need to retire on $6,000 per month?

And…

How much do you need to retire on $7,000 per month?

It was a real pleasure to chat with Kanwal Sarai about my investing approach here.

In this episode we disucssed:

• how I got started with dividend investing
• why I decided to become a DIY investor (see part of the reasons above!)
• when and why I tend to rebalance my DIY portfolio
• and much more!

I enjoyed this video from the guys at Stocktrades.ca. this week: 3 Stocks For Your TFSA – that are passive income dividend growers. 

I have a partnership with Stocktrades including a deep discount for investors should you wish to take advantage of that here.

From the dividend income file, congrats to Rob from Canadian Passive Income on his growing income quest. 

As much as the markets might worry you, a gentle reminder from famed investor, Bill Miller:

In this investor letter, he perfectly captures the posture that most investors ought to have. 

When I am asked what I worry about in the market, the answer usually is “nothing”, because everyone else in the market seems to spend an inordinate amount of time worrying, and so all of the relevant worries seem to be covered. My worries won’t have any impact except to detract from something much more useful, which is trying to make good long-term investment decisions.

Great stuff.

Related Mortgage Reading:

Weekend Reading – Is it worth paying off your mortgage early?

Have a great weekend!

Mark