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Fixed Vs Variable

In the first episode of Mortgage Broker TV #MBTV, 2 prominent BC mortgage brokers; Sabeena Bubber and Dustan Woodhouse, discuss their thoughts on Fixed vs Variable in light of the recent news articles indicating rates might go up in 2015.

This broadcast originally aired live on Thursday January 8th 2015 at 3pm EST to an audience of 53 Mortgage Brokers. Originally published on Scott Peckford’s personal channel.

#MBTV is a video podcast produced by I Love Mortgage Brokering #ILMB.

Host: Scott Peckford
Guest: Sabeena Bubber
Guest: Dustan Woodhouse
Technical: Jackson Middleton


Scott: Scott Peckford
Sabeena: Sabeena Bubber
Dustan: Dustan Woodhouse
Scott: So Sabeena, thank you so much for taking the time to talk today about variable versus fixed. I know that I posted this literally on the Facebook page yesterday and we’ve had 60 people register to find out about variable versus fixed, what’s the best decision to make right now?

I wanted to get you and Dustan together to get your opinion on what you’re telling people. So when I look in the news I’ve seen some news that is saying rates are going to go up right away. Some news is saying the opposite.

So what’s your take on what’s going on?

Sabeena: Well in terms of whether rates are going to go up, I think that we’ve got a very volatile year ahead of us. With oil prices being down, the Canadian, there still has to be some consumer confidence going on.

And with the energy markets being weak right now, we also look at other markets like banking sector, insurance sector, and that kind of thing. And if there’s a rise in interest rates, that’s going to affect the bank rate margins which are going to be tightened, and we don’t want to have issues in both markets, and in both the banking and the energy markets.

So I think that if there is going to be a rise in the interest rates, it’s not going to come until later into the year, and I think it’s going to be a slow, slow process.

I don’t think we’re going to see any big jumps. I’ve heard, was it Benjamin Tal said last year, he was saying, that we’ve been in this environment of low rates for so long that we’ve created a new sense of normal. We have to be careful when we’re raising interest rates and look at the impact on it.
I think that the threat of interest rates is actually going to create a bit of a boom here because we’ve been, I haven’t talked to any broker that hasn’t been busy for the last eight weeks. It’s been absolutely insane. So yeah I think it will leave an increase of rates of sorts but it’s going to take a little while before it comes in.

Scott: Great. And so when a customer comes and talks to you and says, “Okay Sabeena”. I’ll give you an example, because I find for me that obviously the right answer is different for every client. Like it’s not like you can say everybody should go fixed or everybody should go variable I don’t think, then we’re not really doing our job.

So let’s say I have a customer who is—I’m trying to think of somebody I worked with recently—he’s emerged to offering 20% down, excellent credit, you know, his GDS is probably in the 20% range. So you have a client like that and they say to you, “Sabeena, what should I do? Should I go variable or fixed? The bank’s telling me to go five-year fixed.” What’s your, what do you usually say to somebody like that?

Sabeena: Well it’s not just the profile of the client, it’s also what the client goals are and that kind of thing. So I will interview the client to find out more about what their long-term goals are. Are they trying to pre-pay or are they trying to maximize? Are there any taxable benefits of them actually keeping the interest rate higher? That kind of thing.

But for the most part, with that kind of profile client, I’d probably be edging towards the variable rate. They can handle the peaks and valleys of it and they’re probably going to pay a lot less interest over the long term if they’re going to go variable.

But like you said, when you’ve got clients that are—there’s no blanket answer for variable versus fixed. It’s always situational. So if you’ve got a first-time buyer that’s really stretching to buy their first home, that’s not the kind of client that I’m going to put into a variable rate mortgage. I’ll discuss it with him and talk about the strategy and say, “You know, when we get to that next stage when your five years is up, we can look at doing that based on where your income is at.

But going into it, definitely variable for those clients that have room in their income and the room to budget to pre-pay.

Scott: It seems to me that when it comes with the variable rate, we’ll stick that for a second. So the variable rate has two risks. The one risk is, when do I lock in? And then the second risk is, what rate am I going to get when I lock it? So how do you address that with your clients or somebody who is in a variable? Do you have some kind of an answer that you give them?

Sabeena: Yesh, I go back to my Greg Willamson training from three or four years ago, where we discussed the inflation hedge strategy, and that strategy was a big reason for my success in 2009. I had a great year that year.

And basically why would you lock in your mortgage at say 3.5%? Your payment’s going to go up. Why don’t you just increase your payment as if you have locked in and have that extra money go towards your balance?

You’re actually creating a better insulation by paying down your balance faster with that extra lump of payment every month than if you were to lock it at that fixed rate, and you’re still facing payment shock in five years when that mortgage comes up for renewal. If you lock in today at say 2.99, you decide to lock in, and rates in five years are say at 4%, you’re going to have that 1% of payment shock there.

But if you were to increase your payments accordingly, as if you had locked in, you’re paying down your balance and almost saving yourself from that inflationary interest rate of sorts by paying down your balance and creating a lower net payment.

Scott: And so how do you manage that for clients post funding? You know, we had the discussion, okay we should be making these adjustments. Are you wanting our program to do that? Are you doing that manually?

Sabeena: Well I have a CRM where I have my variable rate clients differentiated separately from my fixed rate clients. So I do communicate with them when Bank of Canada meets, to let them know what changes have happened and if they should lock in. If they’re thinking about locking in or want to make changes that they should contact me directly.

Then actually it’s a great opportunity to connect verbally with my clients and then go through their specific situation and make recommendations on how much they should increase their payments by instead of locking in.

Scott: Right. Okay, that’s good. Yeah, I have found that there’s definitely a lot of my clients are contacting me and saying, “I’m a bit stressed about what going to happen”.

Sabeena: Yes.

Scott: So if you’ve got somebody, let’s say in a fixed rate and they’re a couple of years away, what are you saying to somebody who’se in a fixed rate and they’re saying,”Hey, what should I be doing?” What’s your advice for that type of client?

Sabeena: Just to pay as much extra as they have against the balance now, so that when their balance comes up for renewal that they’re not faced. If they reduce their balance now while the interest rate is low, if the interest rate is higher in five years, they won’t have as much payment shock if they get that balance down sooner.

Scott: Right. Okay, so give me one second. I think I might be able to get Dustan on here, maybe. So is there any other like research? You had said that you have stuff that you wanted to share. So do you have any other research or some data that you typically find that’s helpful for when speaking with a client about the discussion between fixed and variable that you’ve been sharing?

Sabeena: You know, I do. I pull from various articles that I see come up. Like when there’s stuff coming up on Canadian mortgage trends and stuff like that, where there’s kind of an impartial party talking about interest rates, I’ll refer my clients to that, but I don’t have that.

And there’s also a tool within Verico where we have a fixed versus variable tool that shows that if the variable rate goes up by a 1/4 point or a 1/2 point a year compared to a fixed rate mortgage, would you still save money over five years? So we can use that tool as well.

And I find that when I’m talking about a variable rate to my client, I always do recommend that they pay as if they were fixed. Whether they do or not is up to them, but I’ve made that recommendation so that in fact that if they do do that they will pay it off faster. And I use my own self as an example. Paying as if I’m at a 3% rate instead of on variable and that kind of thing.

Scott: Right, so that when you do have to lock in presumably you’ll owe less.

Sabeena: And again when you’re telling your clients to lock in, it’s situational. If you have a client that can ride the wave, why wouldn’t they? Because how much is it going to go up and how quickly is it going to go up? How much?

There’s Dustan.

Scott: Are you there now Dustan?

Dustan: Yeah, I can hear you. Can you hear me?

Scott: Yeah. Can you turn up your mic a little bit?

Dustan: Hang on.

Scott: Hey you’ve got a beard. It’s a playoff beard.

Dustan: Indeed I do.

Scott: I find that I got to look down just because I’m trying to see you but my camera’s up so it’s like I’m carrying my laptop. So hey guys, we’ve got Dustan on the line. And we have his ceiling as well.

Dustan: There we go. Have we got audio now?

Sabeena: Yes.

Scott: We’ve got audio. We’ve got visual. This is outstanding. So I’ll switch to Dustan now. Dustan I just want to ask you, I don’t know if you heard because you were trying to get online. But the discussion of variable versus fixed, seems like a lot of brokers are trying just you know having those discussions with their clients. And so I wanted to hear what you’re saying and what you’re communicating to your clients around that discussion.

Dustan: Well, for brand new clients and for existing clients in variable rate, the number one thing I always return to—sorry, are you still there?

The number one thing I always return to with them is that 6 out of 10 Canadians statistically break their five-year fixed at an average of 38 months.

And when they break that mortgage, they’re triggering a prepayment penalty, you know the IRD typically. If they’re with big bank or credit unions. And that prepayment penalty can be 3.5% to 4% of the balance, whereas a variable rate mortgage penalty is typically 0.6% right now. So I always like to make sure they’re aware of the potential penalty exposure that exists within a fixed rate mortgage and weigh that. That’s I think a very important factor.

And especially like the news. I’ve had a number of calls and emails in the past few days myself saying, “Hey the news is saying rates are going up”. I’m like, “Well okay, this morning we all got an email from Scotiabank saying actually rates have gone down 0.05% on the fiveyear.

You know, the lenders, the people who are actually lending the money are actually lowering the rates, but the media has people in this sudden panic that rates are about to start going up.

And one of the stories a client emailed me, I pulled it up and read through it with him. And I’m like, “Do you see the part here where it says Bank of Canada may raise Prime by a 1/4 of a point in the fall?”And he says, “Yeah”. I said, “Okay your mortgage is a $300K mortgage. A 1/4 point on $300K is a $37 a month difference to your payments. Does that have you losing sleep?” No of course not.

But there are a lot of people right now I think losing sleep over where rates are going, unnecessarily.

Scott: Right, yeah that’s good advice. So what I’ve noticed too is that the bond market’s getting beat up, even in the US. Like I was watching the bond market rates or bond prices and it’s just going down. And so you’ve got the media, CBC News came out with this article that seems to be the one that’s driving it. And then they’re saying rates are going up. And then I’m looking at the bond market and I’m looking at there’s uncertainty over oil and are they going to be raising rates if the economy’s going to be growing as fast, because we’re definitely tied a lot to oil.

So what is your take on it? With the US obviously we’re really tied to them, so if you see anything changed in the US coming out that are they going to affect us because they raise their rates, are we going to be delayed by a lot or is it going to be a short delay?

Dustan: My opinion, for what it’s worth, I believe just yesterday the US Fed said they’re not going to be doing anything with rates until April at the earliest. And I mean, this is the story we’ve been hearing out of the US and our own government for years now. “We’re going to move rates soon” and soon never comes. So will the Fed actually raise rates come April? Maybe.Are they going to move them a whole bunch real fast? Not likely.

And even when they move rates, is Canada going to follow suit? Historically we have. And I don’t ever like to fight history. I mean, I always say for arguably 40 years the variable has been the winner. So I’m not smart enough to say today is the u-turn on that.

I’d say the same thing with rates, as far the US and Canada goes. If the US starts to rise, well you know what if they raise rates probably Canada will follow. Will we follow immediately and in lock step? Maybe not. Maybe we will lag behind. So if the US bumps rates in April or May by 1/4 point, maybe that leads to a 1/4 point hike in Canada in August or September. That would be my prediction on that topic.

Scott: Great. So Sabeena, anything else you want to add to that and then I’m going to open up to questions. If anybody has questions they want to throw out for you guys.

Sabeena: Just the Bank of Canada hasn’t said anything about them raising interest rates. It’s all speculation at this point. So you know, Bank of Canada usually—when we saw prime hit its lowest, and then when they started bringing it back to the three, they were giving us warnings well in advance.

And I think what’s going to be important is what happens at the next few meetings, what their indicators are in the next few times that they meet, or what the language is when they set the rate. If they don’t change it next time, what’s their language when they’re talking about that rate? Because I have a feeling that they’ll give us some ample warning before they start increasing that rate.

Scott: Right. And so have either of you been doing any reading on the impact of oil? Because I’m covering two different things. I want to hear from you guys, the impact of low oil prices either causing inflation or disinflation, because I’ve read both so do you guys have a take on that?

Sabeena: Well just that if energy markets are down, that the banks are also going to be, as I said before, the banks could be affected if they started increasing rates and then their profit margins started to get crunched. But it may not be in the favour of the banks to start increasing rates in that sense. So it wouldn’t create a factor in increasing interest rates.

Scott: Right. What about you Dustan?

Dustan: No, I agree. I think low oil prices typically would lead to low rates because you’re conceivably going to wind up with lower employment in the oil patch. And lower employment isn’t going to get the numbers where the Bank of Canada wants them to be pushing rates up.

Scott: Right. It sounds like one of you guys is near an port or something.

Dustan: It’s not me I don’t think.

Scott: There’s something going in the background. [laughs] I can hear something.

Sabeena: I am on the beach, but you can’t hear the boats from here.

Scott: I hear like this horn from the ship. I’m like, what is going on with this thing? So yeah, I really appreciate your guys’ time. If anybody has any questions that they want to ask, I have found that for me you know this discussion on variable versus fixed comes up more and it’s good to get other peoples’ perspective on how they’re answering these questions right?

So do you have any other strategies that you sort of implement in there when you’re talking to them about a fixed rate or a variable rate that helps you sort of communicate with the client? You can go first Sabeena.

Sabeena: Wow, Dustan missed a lot of play time here, so I feel like you should catch up and maybe get some more air time.

Scott: Okay I’ll go to Dustan. So Dustan do you have any strategies that you find helpful when you’re communicating a rates to clients?

Dustan: You know I’d like to say thanks Sabeena. As I say, I do focus on prepayment penalties and I don’t think that my clients have necessarily heard me the first time that maybe when we set the mortgage up. That’s a decision that drives them towards variable.

In my own book of business, about 85% to 90% of my clients go variable. So I’ve got a whole lot of people that are going to be you know worked up when rates do start moving.

But you know, as they say, I circle back onto that penalty conversation a lot of the time, especially if it’s three, four years in. You know, “Do you see yourself in that property for another five years? Is there a potential change that may cause you to break that mortgage?” Hard to predict at that point. Or maybe it’s easier to predict, I should say. So that’s always the topic.

But every New Year’s I send an email out to all my clients, like I did just recently, encouraging them to bump their payments up by $50, $100. And if they keep doing that year after year, as Sabeena touched on earlier, they’re building in that padding. Where not only is that extra money more quickly bringing the balance down, but in addition to that they’ve also got…

Scott: Where did you go? Technology’s wonderful when it works, right Sabeena?

Sabeena: Yes. [laughs]

Scott: You know what? This is the best. Dustan is probably like some secret recipe you’re sharing. We can’t hear you.

Dustan: Are you still there?

Sabeena: He’s going to start throwing the headphones at the screen any minute now. [laughs]

Scott: Okay I’m going to do a little poll that I’m going to…

Sabeena: It’s a good thing I let him go first, right? [laughs]

Scott: Yeah.

Sabeena: At least he got a little snippet of that.

Scott: So what was the last thing you just said?

Dustan: Where did you lose me?

Sabeena: I can only tell you what your facial expression was. [laughs]

Dustan: Yeah I got lost.

Sabeena: We were talking about the New Year’s email about bumping your payments and padding your balance.

Dustan: That’s right, sorry. So exactly as Sabeena was suggesting earlier, building in that buffer against rising rates and also paying the balance down faster.

And the number one thing that I set clients up with from the start is let’s make your payments based on a five-year fixed, but let’s take the variable rate. And then they’re truly getting the advantage of a variable rate mortgage, in my opinion.

Scott: Right. Anything else you want to add, Sabeena? And I’ve got a comment from the chat room that I’ll mention.

Sabeena: Yeah, I see that comment actually and I’d like to address that comment about the IRDs, in a rising rate environment?

I’m finding that with the banks, I’ve had situations where I’ve had clients in a higher rate. Or, pardon me, in a lower rate going to a higher rate and still paying significant IRD. So they’re going to be paying a higher interest rate. Same institution. Still paying 4% of the balance.

So I don’t think that IRD is on the basis of there being that the client is breaking the mortgage and getting a lower rate mortgage. They may be getting a higher rate fixed mortgage at that point and they still are faced with that IRD. I’ve seen that in the chartered banks at least. Not like that. Not with the model line lenders.

Scott: Right. Yeah have you seen that Dustan?

Dustan: Yeah absolutely. I mean what a lot of people fail to understand is that IRDs are based on the shorter term remaining. So if you’ve got three years of the way into a five-year, your IRD is being based on the twoyear with the discount applied to it.

So even if five-year rates are to rise, that doesn’t necessarily mean the two-year rates or one-year or three-year rates will rise, because those tend to be predicated on Bank of Canada prime.

Scott: Right that’s true.

Sabeena: And the discount between the posted rate and the discounted rate. Like say you’ve got, like Scotia today dropped from 2.99 to 2.94, but the posted rate hasn’t changed. All that’s changed is that discount which increases their IRD.

Scott: I once had a Scotia client who—and I shouldn’t say their name but it’s fine—so I had a Scotia client. They had a mortgage that was from last year. It was 2.89%. It was right aroung $300K and they wanted to break it and at the time Scotia’s rates were 3.09 on a five-year fixed and their penalty was still something like $12K.

And my client was like, “How can this be?” Like they were actually breaking it. They were one year in and their new five-year rate would have been higher, but I don’t find that as much either with the credit unions or with the model lines. They seem to be a lot more fair on the penalty calculation.

Sabeena: Yeah. If I’m going fixed, if I have a client that absolutely insists on going fixed I won’t place it with a Scotia, I’d rather they go with the variable. With the chartered banks I would rather do a fix with the mono line lenders just in case.

Because as I said on my post yesterday it’s something that you know people are prepared for. That 6 out of 10 people that think, “Oh I’m going to be there for five years”. But then there’s things like, my one client showed up one day and her husband had left a note on the door telling her that he was leaving her, and that was the end. And she had to sell the property because she couldn’t afford it on her own.

So, and that wasn’t something that she was prepared for and that wasn’t something that the you know the mortgage that we had structured the mortgage product and at that point they’d been married for 15 years. So not expecting that, but things happen, peoples’ lives change and we have to, since we see that more and more we have to anticipate some of those changes and prepare our clients for that.

Scott: Any last words Dustan before you have to go back to work?

Dustan: No, on that topic I agree completely. I mean life is very unpredictable and I usually take my clients through a short arc where I talk about two young, single, 20-somethings or 30-somethings who each buy a studio or each buy a one bedroom. They take a five-year fixed because mom and dad said that was smart. They buy in a rental restricted building because mom and dad said that was smart. Then they meet each other, fall in love, and now they’ve got one too many studios, and they can’t rent one, so they’ve got to sell it. So there’s the first penalty.

And then they wind up pregnant and the studio is too small. But it’s okay. They’re going to be able to buy a bigger house because they got a great job in the oil patch. So he’s moving from BC to Alberta, but they took that other mortgage with a credit union. So they can’t port that to the other province. A lot of people are unaware of that. So boom there’s another penalty.

And you can take them all the way through about 8 to 10 different penalty scenarios that for the most part are good news stories. And then, of course, there’s all the bad news stories and this tends to be the time that a lot of those bad news stories come out every year. People make it through the holidays and then January, February you do get a lot of splits.

And again, a lot of people, like Sabeena said, they can’t afford to carry that property on their own and they’re back into a penalty. And to your earlier comment, Scott, I too had clients just recently with that same lender and $400K.

Scott: Can’t say the name.

Dustan: Yeah exactly. $400K mortgage, six months in, 2.99, five-year fixed. Rates hadn’t changed: $18K penalty, 4.5% of the balance. And I made it crystal clear to them that they should A, go variable, and B, do not take a five-year fixed with a chartered bank. Here’s how the penalty works. I even sent them a link to the bank’s penalty calculator and to a model line’s penalty calculator and I explained to them like play with it. Look at the difference.

And so at least I had done my work. So in that case, I wound up assisting both of those clients with their new purchases. Because neither of them was upset with me, because I had explained it crystal clear. I had it all documented in emails. So they weren’t happy with that penalty, but they weren’t holding it against me either.

So that’s where the education of your clients really pays off in the long-run.

Scott: Right. That’s killer advice. So anybody listening, take notes on that because that was awesome. That whole spiel. Good thing we’ve got this recorded, although there’s a bit of messups in the beginning.

Sabeena, anything you want to say before we’re done?

Sabeena: No. Thanks for having me on.

Scott: Okay well thank you guys for coming. Thank you everybody who attended. I think we have like 48 people on the call which is crazy. And there will be a recording sent out so you can go back and review, or if you want to catch those parts where it was all messed up, then you can do that.

So okay, see you guys.

Sabeena: See you, bye.

Dustan: Take care, thank you.

[0:25:12].9 End Transcript.