Variable rate mortgages are a sweet deal when interest rates are falling, but apparently not so much when rates go in the opposite direction. It makes for a life just full of surprises, but not the happy kind.
We had a 1.3 per cent variable mortgage rate, which amounted to two payments of $1,275 each month, plus $370 in monthly maintenance fees.
On June 1, the Bank of Canada raised its key interest rate to 1.5 per cent, a half per cent hike. That month, our biweekly payments rose to $1,500.
July rolled around and our payment increased yet again. A couple days later, I went to buy gas for our car, thinking Evelin and I had $600 in our joint account. To my surprise, there was only $100 in there.
We’re paying more than $5,000 a month to live in a 900-square-foot townhouse, and $3,500 of that total goes to interest alone.
I had conversations in and around the early 2010s with a lot of my friends who were all buying houses for hundreds of thousands of dollars more than they were selling just a few short years before. They all bragged about their mortgage rates and I told them that mortgage rates fluctuated and they didn’t think so (probably because they never saw them do anything other than go down).. so they were sitting on mortgage rates of 2-3%. But I remember my first mortgage being 7.43% and I also remember hearing my parents talk about the ’80s when mortgage rates were I think as high as 20%. I would tell them that the only reason they have that low mortgage rate is because the price of the asset has gone up astronomically, and I would ask them: would you pay $2M for a house in this shitty canadian city if interest rates were 0%?
I read the article, not impressed with the couple. Supposedly well-educated, but went with a variable rate mortgage on the advice of their 30 something banker.
I bought my first house in 1983, my mortgage interest rate was 16%. I purchased a fixer-upper. I had an 80% down payment and was almost denied a mortgage because of being single, self-employed and a woman. Had that sucker paid off in 5 years. My second house, again a fixer-upper, was at 14% interest rate – I was thrilled.
I do not think this couple had saved enough for a down payment and should never been given a mortgage. As well, they live in a very expensive city. I do not cry for them at all.
Your story is anlmost identical to mine … thank you, Jimmy Carter for my 16.5% mortgage! I then upgraded significantly to a top, top, neighborhood (worst house in the neighborhood) … leveraged with a variable rate mortgage … and proceeded to make 3 different remodels to the home. I had a series of variable rate mortgages … culminating in the current 2-1/2% 30 year mortgage I have now. My home is now worth 35x what I paid for it in 1983.
What is really sad … is that my own children … despite being far more successful in $$$ than I ever was … are priced out of the S.F. and LA home market. Oh! And the first home ai bought and improved? That neighborhood is now referred-to as little Tijuana … yeah … turned to shit.
60000 a year for something that would have been 60000 in total 30 years ago . wait till the liberals tax imputed rent . they already have that set up in the tax code.
I was today years old when I learned what imputed rent was. Gobsmacked I am.
‘Imputed rent is the rental price an individual would pay for an asset they own.’
Ah. Yeah. Taxing on the fact you paid it already. For the rent you can’t ask because you need to live, too.
That would be like taxing for your genitals for imputed rent. Your choice you don’t rent them.
The idea is to drive us out of our own homes and into a cubical owned by a conglomerate such as Black Rock or Bill Gates. And you’ll be happy … now eat your crickets and shut up.
They are doing the same with motor vehicles.
Also gobsmacked after reading what it is … holy crap. Can you explain more about “they already have that set up in the tax code”?
RNrn
VRMs are historically the better deal by a long shot. For the past 30 years. But you should never over extend with one
Until the bottom falls out.
Allan
I think you are better off if you protect the down side. What good are cost savings if you get wiped out?
Years ago, I took a fixed mortgage at 6.5%. It had a 25 year term. My intellectual friends said I was crazy.
Here’s what I told them. Imagine you can afford to pay $2000 a month on your mortgage. Get a mortgage term that requires you to pay only $1000 a month (i.e. 25 year term)
Now pay $2000 a month. Most banks applied the extra payment to the principal.
But here’s the important bit, after a year you have essentially built up one year where you can make no payments, should (for example) you lose your job.
I paid off my mortgage in 8 years. Some of my intellectual friends, had to sell their homes when they lost their jobs.
Protecting the downside can be a good idea.
alla unDork
again you should your fiscal and math illiteracy.
VRM’s are an unknown future liability, thus best to stay away from them, unless you have deep pockets, and use them for investing your liquid cash.
Gym,
That is not really fair. In an actual sense VRM’s will be cheaper because the yield curve is normal i.e higher for longer terms. We have been through two years of an inverted yield curve due to Western world profligacy. That is not the normal state of affairs, so you can win on interest buy borrowing short and investing long, the caveat being you need adequate ability to absorb shocks. All that said, normal may prove no longer normal given the absolute fiscal insanity around us.
False. They are predictable and even if rates stay the same you are usually way ahead. Use the extra cash flow to pay down the mortgage faster.
VRMs have always been the better choice for the past 30 years, even with the recent jump.
The key words….
“Use the extra cash flow to pay down the mortgage faster.”
Most variable rate borrowers just expected rates to stay low, so they never bothered saving anything.
Gotta get a nicer car and bigger TV than the neighbours!!!!
But hey! No problem!
Just extend the amortization to 35 years…. 50 years…. 65 years.
What could go wrong?
We just renewed our variable rate, and at renewal put down enough to knock almost 50% of the balance.
We kept our payments the same as they were before, and were able to keep our prepayment privilege on top of that. If I get a chance to use that prepayment in full, I have 12 months left on this mortgage… and if not, less than 3 years. I got my first mortgage when rates were coming down in the early 2000’s and got a five year fixed at 4.99% and I thought that was free money… after watching my parents pay between 13% and 18%. I know I am extremely blessed here, but we are forgoing a big Christmas etc to pay of as much as we can on the house. No more will the Turd in Ottawa keep effing me over on housing, something else, yes, but not that… Eff You Turdope!
$668,000 for 900 SF?!? That’s $742 per SF! Toronto’s housing costs are ridiculous by American standards. You have my sympathy.
If you think our housing is ridiculous, you should try our taxes.
People are getting too itchy to keep up with the Jonses, and treating their house like its an equity ATM, and getting in way above the heads with square footage that they don’t need.
I locked in with a decent fixed rate as soon as I could a couple of years ago. My wife wanted to move to the city to be closer to the amenities as we get older and the kids start trickling out. I may not be the most savvy person, but something didn’t smell right and I decided to hunker down with what we have. In retrospect, it was the best decision I’ve ever made.
Richard Dickey says, ” I would tell them that the only reason they have that low mortgage rate is because the price of the asset has gone up astronomically, and I would ask them: would you pay $2M for a house in this shitty Canadian city if interest rates were 0%?”
It’s the other way around. The low mortgage rates allowed the housing prices to rise. Most people don’t look at the house price; they look at the monthly payment, and many of them buy as much house as they can afford to make payments on. Intense competition for available housing drove the prices through the roof.
We bought the last $60K house in our hometown in 1980, and took out a five-year, 15% mortgage. Our friends told us we were crazy, that the rates couldn’t go any higher, and to take it out for a year at 13% or so. 18 months later, the rates were 22% and there were empty houses everywhere; the banks could hardly give them away. Ours was worth, at most, $45K at that point, but we had no plans to sell, and we survived, by the grace of God. Our next mortgage was 12%, the one after that 11%. Young people today seem to disbelieve me when I tell them about such rates.
That old house now (built in 1972) is probably worth (on the market) at least $450K, far beyond its actual worth, and that’s due to the low rates. If rates went to 15% again, it would go for maybe $100K.
Dan
Exactly, the house I bought after I split with the X, was built in 1870 or so, paid the bank 225K (it was a repro that the mtg uptic caused in tghe 80T’s) and now sells for well over a million. It is a hogpog legal tri-plex
“We spend hours driving from store to store in search of the cheapest groceries,…”
I’ve never been fond of that logic, especially now.
Yeah, they publish their fliers on line and most do price matching for items in fliers.
They should work another job during those hours and stfu.
What they save on food is spent on gas. Not worth the time spent chasing around.
‘partially’ spent
Spending quarters to save dimes.
Rationally a VRM always wins. Fix rates are set to cover the bank risk and are always higher than a VRM. Do the math. Ask yourself how much the VRM would have to go up in the future to exceed the total of what you would have paid on a fixed rate. (hint… it is higher than you think). This is the total spent you need to look at, not the differential in the rate.
However, if you are risk averse then by all means go to a fixed rate.
I have no sympathy for these people. They knew what they were getting in to.
Do you have insurance?
The total cost of insurance is greater than the sum of all the payouts. This means that technically you’d be better off not buying insurance.
Sometimes it’s worth protecting the downside.
@ Jimbo: It is all about timing. I have a friend who took out a VRM around 2012 and it served him well and he renewed 5 year later for another 5 years and again, it worked out well. But when he renewed in the autumn of 2022, he latched onto a fixed rate for under 2% for 5 years. Turned out to be a very astute move.
Deciding to go with a variable or fixed rate mortgage depends on where you think rates are heading. After the US housing crisis and great recession we opted for a variable rate because central banks were obviously cutting rates. Then we switched to 5 year fixed rate a few years later because we weren’t sure if the low rates would hold much longer.
In the next year or so we will renew the mortgage. I think interest rates are at/near their peak so we might opt for a variable rate unless the 5 year fixed goes down before we sign the papers. Besides, we have pretty much decided on selling the house and moving out of Canada in the next 2-3 years so a variable mortgage is probably the best option to avoid mortgage break fees.
“Deciding to go with a variable or fixed rate mortgage depends on where you think rates are heading. ”
It is difficult to make predictions, especially about the future.
Danish proverb
I think Yogi Berra was an American.
You have to understand your risk tolerance. We live below our means so we generally have the flexibility to absorb unexpected events.
Hey Toronto, when you decide to stop electing Liberals then maybe the rest of us will have some sympathy for you. Until then, enjoy the hell you helped to create.
Yup. That fact doesn’t get enough press.
I bought a condo in 2021 for my old age (with plans to rent it out until then). This just before the rates went sky high and the 20 something mortgage ‘expert’ was trying to convince me to take a 1.8% variable rate mortgage instead of a 5 year fixed at 2.3%. I mentioned that, because I was renting the place out, I wanted security as to the mortgage as everything else in the rent calculation was going to be variable – insurance, taxes, condo fees. She tried her best to get me to change and when I mentioned that I lived through the 1980s with 17, 18% mortgages and even when I bought in early 1990s my mortgage was 8.2%. She thought I was lying – so I don’t have any faith in a lot of what financial institutions are telling me if she was the example of their expertise.
“We’re paying more than $5,000 a month to live in a 900-square-foot townhouse, and $3,500 of that total goes to interest alone.”
The fact that their “first home” is $668,000 told me all I need to know on the sympathy scale. Canada is obviously overpriced in most housing markets, but even in the worst markets there are smarter alternatives for a young couple.
So now that $3,500 per month goes to interest, there is no doubt that they could rent somewhere reasonably close by for less than that interest payment in the interim. They may have to choke back entitlement attitudes a little though.
They ain’t seen nuthin’ yet. Some of us remember Trudope 1.0 and the double-digit mortgage rates. The idiot he raised (doubt he fathered him) is trying to blow past those mortgage rates because “green reset” or some such BS.
Based on their combined income, they should be looking for a property that’s half the price of the one they bought. Yes, I realize that means they can’t afford to live in Toronto, so move a smaller community where housing is less expensive, news flash, me and a whole bunch of my generation did that 40 years ago and most of us are fine.
The banks have convinced people to live in assets. “Home” has lost all meaning.
Of course, real math and basic economics are never taught in schools anymore, so no one signing up for a mortgage gets it. Kids are not taught enough economics to understand yield curves and how to avoid financial risks.
Ideally, one needs at least a sizable 25-50% down payment, and enough predictable income to support a five-year fixed rate mortgage that is about maximum 30% of after-tax income. Variable mortgage rates are NOT for novices.
I gifted/invested with my children for “roofs” and told them not to sell for 5 years. They still own these properties after 20 years. One is buying our shared investment, so is renting and has a debt now, as the family needs title, because it was too small for a growing family, but they are fine renting and living in suburbia.
The other child is Can-Am dual citizen, so it was simpler just to gift.
The canadian well-located property quadrupled in value, but the US one, not so much.