Below is a recent post from my client facing blog.
As a Broker with 90% of their clients in variable rate product, or two year fixed product, the #1 way to keep your phone from exploding, and clients themselves from exploding, is via regular updates on what, when, and why the Bank of Canada is doing what they are doing.
Most importantly, these updates provide reminders as to why clients made the decision that they made at the time of closing.
Words to live by: ‘I advise, clients instruct.’
It’s easy in the face of a 0.25% increase in rates to lose all perspective… No, wait, how can that be? We are talking 0.25%!
Nonetheless for some clients a 0.25% increase might as well be 25% until actual math is done, as per below.
Proactive steps like this one below keep heart rates low, and incoming phone calls to single digits, despite my having more than 1,000 clients in variable-rate product.
So I offer you the material below to use as a basis for an email from you to your own clients.
Please don’t copy and paste it to your own blog – Google does not like it when identical material pops up on your site a few weeks after it’s on another site
Please do craft the words into your own and forward them on to your database.
Hopefully this helps calm a few of your own clients.
Are you in a Variable Rate Mortgage? Me too.
Are You in a Variable-Rate Mortgage? Me Too.
If you’re in a fixed-rate mortgage, this news has no impact on you. Mind you, ‘impact’ is too strong a word for the subtle shift that occurred Jan 17, 2018.
The math is as follows:
A payment increase of ~$13.10 per $100,000.00 of variable-rate mortgage balance (unless you are with TD or a specific credit union, in which case payments are fixed and change only at your specific request)
For example, a variable-rate mortgage with a balance of $400,000.00 will see a payment increase of ~$54.40 per month
Personally, we are staying variable, for a variety of reasons…
Qualification for variable-rate mortgages has been at 4.64% or higher for some time. This requires a household income of greater than $70,000.00 for said $400,000.00 mortgage.
Can 99% of such households handle a payment increase of $54.40 per month? Yes.
Will 99% of households be frustrated with this added expense? Yes.
Ability and annoyance are not the same thing.
Have these households enjoyed monthly payments up to $216.80 lower than those that chose a fixed-rate mortgage originally? Yes.
Are 99% still saving money over having locked into a long-term fixed from day one? Yes.
Should I lock in?
A more important question is ‘Why did we choose variable to start with?’ And this may lead to a critical question, ‘Is there any chance I will break my mortgage before renewal?’
The penalty to prepay a variable mortgage is ~0.50% of the mortgage balance.
The penalty to prepay a 5-year fixed mortgage can increase by ~900% to ~4.5% of the mortgage balance. A massive increase in risk.
There are many considerations before locking in, many of which your lender is unlikely to discuss with you. It’s to the lender’s advantage to have you locked into a fixed rate; rarely is it to your own benefit.
At the moment decisions are being made primarily out of fear. Fear of $13.10 per month per $100,000.00
What about locking into a shorter term?
Not a bad idea, although this depends on two things:
- Which lender you are with, as policies vary.
- How many years into the mortgage term you are.
If your net rate is now 2.95% and you have the option of a 2-year or 3-year fixed ~3.00% – this may be a better move than full 5-year commitment.
Do not forget the difference in prepayment penalties. This is significant.
Bottom line: Know your numbers, know your product, stay cool, and ask your Broker.
These are small and manageable increases.
It was a bit disappointing to see logic and fairness fail to enter the picture after the last two Federal cuts to Prime in 2015 of 0.25% each. The public received cuts of only 0.15% each time.
Every single lender moved in unison; not one dropped the full 0.25%.
Amazingly, not a single lender saw fit to increase rates by the exact same 0.15% on the way back up. Every lender has instead increased by 0.25% – a full 100% of the increase passed on to you, the borrower.
Not cool man, not cool at all.
We share all the pain of increases, and get only part of the pleasure of decreases.
I am disappointed by this. Not surprised, but disappointed.
Have an excellent day!