People are constantly asking me what product to take, and are quite obviously torn up about it, so I did this video blog to explain what product to take: fixed or variable.
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Transcription of the Video Blog:
Hi everybody, it’s Rowan Smith from The Mortgage Centre. I’m going to tackle the biggest question I get every day: should I get fixed, or should I take variable, and what’s going to happen. I don’t have a crystal ball, but I do have several years in the industry – it adds up to about 10 – and while I haven’t seen the 80’s since I was a kid, I do remember what was going on at those times and I’ve still dealt with many clients that have told me stories.
Here’s my opinion, for what it’s worth, and what I think you should be looking at:
First off, which strategy is best?
It depends on your situation.
Anybody that say otherwise is not worth the license on the wall. Your unique financial position dictates whether or not a variable rate is an option for you, and it dictates whether you should be taking a fixed rate.
Picture two people in exactly the same situation with mortgage amounts and income that are the same. The thing is: one guy is a commissioned person. The second guy makes a base salary. Obviously, the person that makes a base salary, that makes that amount of money can know it’s going to be there. The guy with the commissions doesn’t know that.
Now, if they had to stretch, or even worse, if they needed the variable rate mortgage in order to qualify for that in the first place. If they need to take variable, so they know they can afford it, well, variable rates change. Rates rise. People in that situation should absolutely not be in variable. They should be in a fixed rate so they know what their payment is going to be, because they know that their salary is going to be a set amount.
Now, on the flip side, if somebody is buying well within their means, and they have the affordability of the payment; maybe the payments make up a very small percentage of their annual income, then they can take that risk that the rates are going to rise. They can afford to take a variable rate mortgage.
I myself have taken fixed rate mortgages on 2 out of 3 that I’ve had. The reason being is, my income fluctuates. I want to know at least one thing is stable, and that’s the payments. So I took the fixed rate.
People that have a risk aversion to possibly paying more, or are going to lose sleep over their rate possibly increasing: these are not good candidates for a variable rate mortgage. Sometimes it’s best to just take fixed if that will give you peace of mind and put your mind at ease, and also provide you with two, three, five, or ten years of price stability
You look at a payment right now that is $2,200. I’m just grabbing this number out of the air. Look five years from now. Look ten years from now! What is $2,200 going to mean for the house that you’re in right now. Is that going to mean a lot of money? Chances are, with inflation, job increases, wage increases, promotions, moving up within your career, that payment will present a much lower percentage of your overall income in 5 years. So if you are struggling to make ends meet, and you’re looking at that mortgage payment that I’m presenting you with and you’re saying, “Rowan, I don’t think I can take a 5 year, I need to take a variable,” then I don’t think you should buy the house. Variable rates are not a way to lower your monthly payments so you can afford it, it’s a way to take a risk and take a lower payment, but face the upward chance that rates could rise, and thus your payment could rise.
It doesn’t take a lot of rate increase just to make that payment quite high. If today’s prime rate is two and a quarter, and you’re in a variable rate at prime, and you’re looking at it going, “yeah, but I took a three year at 3.49%,” well how much is that? It’s a point and a quarter that rates have to move, FROM THE LOWEST HISTORICAL POINT THAT RATES HAVE EVER BEEN.
So what should you be taking today when all you have above you is rate room to move upwards ,with virtually no downward move, again:
It depends on your unique situation. Call me up, we’ll go over your numbers, we’ll go over your job, your career, what you’re going to do in the next few years. Are you going to have kids? Is someone going on mat leave? Are you going to be leaving the country? Are you going to travel? These are all things which play into this. If it’s going to be a rental property, then perhaps your want to simply minimize carrying costs. If it’s going to be a home, then maybe you should be looking at keeping your costs stable so your housing is a fixed cost in your budget.
I don’t know what your situation is, but I can certainly help guide you and coach you in what is best for you.
Anybody that doesn’t look at your personal situation and just screams, “variable is best and always best. You save the most!” is absolutely providing dangerous financial advice and you should be asking around.
Thanks for watching!