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  • Writer's picturePaul Therien

Low Risk Tolerance? Read on!

In Canada there are two types of fixed term mortgages that dominate the marketplace, fixed rate and variable, or adjustable, rate mortgages. Both of these products offer homeowners with differing benefits that can change depending on the rate environment that we are facing.

For customers who are comfortable with taking a bit more risk a mortgage with a rate that changes according to prime might make sense. While you face the prospect of your rate, and payments, increasing when rates go up, you also benefit when rates are low or dropping. Given that over the past 20 or so years the government has kept rates low to fuel the economy, homeowners have enjoyed unprecedented low borrowing costs.

As rates have increased there has been a lot of debate about variable rate mortgages, and even some discussion about whether or not people should have been placed in them in the first place. While there are varying opinions about that topic, most critical in the discussion is what can the borrower bear in terms of their risk tolerance.

Most people consider risk tolerance to simply be the willingness to absorb a larger payment. Willingness does come into play, but perhaps more than it should.

When someone is buying a home, it is an emotional process for them. Logic is there, but the fact is that most major purchases come down to emotion. We fall in "love" with a home, or we fall in "love" with the idea of making our fortune buying an investment property. Property is the safest investment that we can make, land is precious, and having the ability to own property is truly the Canadian Dream. When done properly owning a home can result in stability and security, when done poorly there can be irreversible harm caused.

If you are in a variable rate, or you are considering getting a mortgage, it is important to look beyond just the payment today. As a borrower there are a couple of other questions that you should ask yourself.

1) If you are looking at a variable rate mortgage, you should not only consider the payment of the day, but also consider what your maximum threshold for change is and what is the room in there to allow you comfort?

2) Does the thought of your payment suddenly increasing cause you to lose sleep, create anxiety, or will it result in any financial duress?

3) Are you in the type of employment, or industry, that could possibly create economic uncertainty?

If you said yes to any of those, then you may want to consider a fixed rate mortgage and you might even want to consider looking at longer terms.

In 2020 and 2021 interest rates were at historical lows and many Canadians entered into the property market to take advantage of the lower rates. The savings on borrowing costs were tangible and with lower rates it meant that we could, on average, afford to borrow more. There was a frenzy to snap up properties while the money was cheap, and we saw the largest increase in investment property ownership in history. The majority of people went into 5 year terms, and depending on where the stats come from Variable rate mortgages represented more than half of the mortgages done.

Those who got variable mortgages are feeling the pinch today from increasing rates. Those who did 5 year fixed rate mortgages are now faced with renewals in the next 2 - 3 years at rates potentially more than double what they were. For most they can financially withstand the change and will come out perhaps a bit poorer, but they will survive.

For a lot of people however they were lulled by the mantra of "rate is king" and that the rate is the single most important part of a mortgage. That is true to a point, rate is a massive influence on the size of the payment, and the total cost of borrowing to buy the property. Lower rates can save tens of thousands of dollars in costs over the lifetime of the mortgage, we all know this to be true.

Rate however does not take into consideration a person's tolerance for fiscal changes. Rate increases, economic down turns, and more can place a once secure person into a situation that is fraught with uncertainty and risk. Other considerations, such as source of income, risk tolerance, and others need to be considered before signing on the dotted line.

Haystax had a couple of clients over the past two years who were all convinced that they should be in a variable rate mortgage. When we sat down a considered their entire financial circumstances, we ended up placing them in mortgages with 10 years terms at a rate of around 3.5%. At the time the rate seemed... outrageous given that there were 5-year fixed rates available at 2%, but as it turns out these borrowers are now sitting very comfortably in their homes. The mortgages we sourced were portable, which means that if they decide to move, they can take their rate and mortgage with them. The mortgages were also assumable, meaning that if they choose to sell the new buyer, if they qualify, can assume the mortgage and get the low rate.

One of our customers who bought an investment home with a 10-year mortgage sold the home due to some unforeseen financial challenges. The new buyers secured a rate of around 3.5% in a climate of 6+% rates for a 5-year fixed because the mortgage was assumable. This not only assisted the new buyers in being able to afford the home, but it made it much easier to sell the property.

To be clear, Haystax did earn a commission from the lender for the 10-year product that was slightly higher than what was paid on a 5 year. We did not earn any commission on the transaction that facilitated the sale of the home in the above example, and that is OK with us because sometimes it needs to be about what is best for the customer, not us.

We are not saying that fixed, or longer term fixed, is the ultimate mortgage solution for everyone. What we are saying is that there are more options out there than the majority of consumers are aware of, and you have a right to explore all of them. That includes asking about longer term, fixed rate, mortgages that can provide greater payment stability. For those on a fixed income, or in a situation where payment fluctuation can be difficult to support, borrowers need to know that there are real options for them.

If you are risk adverse in your life normally, if inflation and other economic factors cause you stress, a variable rate mortgage might be the absolute worst lending product you could ever have. Never mind the rate savings, if you have to completely overhaul your lifestyle and become house poor that castle can suddenly look a lot more like a prison.

Even in today's climate of increasing rates, there are ways to structure a fixed rate mortgage that allows you to save tens of thousands on interest, shave years off of the amortization, and provide you with the financial and housing security you deserve. Make sure that you ask the questions, and if you are not finding that you are getting wholistic advice... it might be time to let Haystax provide you with the ethical advice you need to secure your financial freedom.

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