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Variable vs fixed mortgages? It’s complicated

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Variable vs fixed mortgages? It’s complicated

Canadians are now into the busiest season for real estate. More homes change hands during the spring than at any other time of year. One decision homeowners will have to make about their new purchase is the kind of mortgage they will sign up for. Historically, variable rates have saved money, whereas the five-year fixed has provided the stability many conservative homebuyers want.

But that decision is getting complicated. Canada’s biggest bank, RBC, has cut its five-year fixed rate. Several banks, such as TD Bank and BMO Bank of Montreal, have quickly followed and cut their five-year fixed to the same level.

The move by some of Canada’s commercial banks is overdue. Unlike variable rate loans that are affected by the Bank of Canada’s benchmark rate, fixed rates are tied to the bond market. Bond yields have been dropping for the last two months.

Rate savings

The yield for the Government of Canada’s benchmark five-year bond fell from a high of 2.48 per cent on Oct. 5, 2018 to a low of 1.76 per cent on Jan. 3, 2019. This means it’s cheaper for commercial banks to borrow money at a fixed rate. Therefore, they can offer those interest rate savings to their mortgage customers.

The cut to fixed rates has shortened the spread between the variable and fixed rate mortgage. The Bank of Canada usually raises rates by 25 basis points or a 0.25 of a per cent each time. With the BoC hinting at raising rates 2019, one rate hike would mean your variable rate mortgage would become more expensive to service, than if you had locked in at today’s fixed rate.

For the first time in many years Canadian mortgage seekers are faced with a unique challenge. Previously going variable often meant saving money over the long term. Those who had the stomach to handle interest rates going up and down were the perfect candidate for a variable rate mortgage. For those who wanted security of knowing what their payments will look like, the fiveyear fixed has always been popular.

Rock bottom

The other problem is rates have been at rock bottom for so long that for many homebuyers it’s hard to see rates rise anywhere close to normal. But if we look back to before the financial crisis, before rates were slashed to record low levels, the prime rate at commercial banks was 6.25 per cent in July 2007. At that level, rates were considered much more normal.That rate is 2.5 per cent higher than what prime is today.

What new homebuyers and those renewing their mortgage term have to ask themselves is, could I afford this mortgage loan if rates were two to three percentage points higher?

Canadians need to prepare for higher rates, by making lump sum payments and accelerating their regular payments. Take advantage of lower interest rates, and if I was in the market for a mortgage today, I would strongly consider locking into the special fixed rates being offered by banks, because it seems it is almost guaranteed to beat the variable rate in the next five years.

Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.


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Consumer Protection: Partnerships are the Backbone of Success

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Consumer Protection: Partnerships are the Backbone of Success

When investing in a new condominium, you want to know that your new home will be properly built, safe to live in and covered by a new home warranty if anything goes wrong.

Tarion plays a role in fulfilling those expectations — but we don’t work alone. Like any thriving industry, partnerships are often the backbone of success.

Historically, the many different parties in the new home building industry have worked together on a number of issues like protecting buyers from illegally built homes, radon awareness and emerging trends. Take for example, the falling condo glass issue that has been prominently featured in the media since around 2011.

Once it became apparent that this was more than an isolated incident and involved various building projects by different builders, the City of Toronto and building industry association members requested an expert panel to tackle the problem.

The panel, comprised of industry partners like engineers, the Ministry of Municipal Affairs, municipalities from across the GTA, building science experts, condo builders and Tarion, requested an emergency change to the Ontario Building Code. The revised standard required glass balcony guards to be both tempered and laminated so they would act like a windshield on a car and stay together if breakage occurred.

Mirabella Condos by Diamante.

Whether your new home is a house or a condo, getting it from sales brochure to a standing livable structure involves a complicated system of standards, permits, inspections and finally, warranty coverage. Proper protection for you, the homeowner, throughout this process requires coordination and cooperation from Tarion and two of our long-standing partners – the Ontario Building Officials Association (OBOA) and the Ontario Homebuilders’ Association (OHBA).

So it’s fitting that after a long history of informal collaboration, Tarion recently joined with the OBOA and OHBA to formalize this relationship and announce the creation of the Ontario Building Partnership.

While each organization plays a different role within the industry, we share a commitment to increase consumer confidence, enhance the new home ownership experience and continue to ensure Ontario’s home building industry is regarded as a world class leader.

So how does this partnership benefit you, the home buyer? Among other things, it means we will be expanding our efforts to advocate for a province-wide model to protect home buyers from illegal building, collaborating on consumer education and homeownership issues and working on establishing more consistent building standards across the new home building industry.

Ontario’s home building industry is changing at a rapid pace. As those changes occur, it is more important than ever that we are all are aligned in protecting consumers. After all, your new home or condo is likely the largest investment you’ll make in your lifetime. We want to make sure you purchase with confidence and we are proud that this partnership brings together three industry leaders who all share this commitment.

HOWARD BOGACH is president and CEO of Tarion Warranty Corp., a private corporation established to protect the rights of new homebuyers and to regulate new home builders.



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