It’s an interesting time to be shopping for mortgage rates. On the one hand, the Bank of Canada’s emergency rate cuts have slashed its key lending rate to 0.25 percent. The big banks followed suit, dropping their prime lending rates by 1.5 percent. On the other hand, bond yields have dropped to historic lows, which should send fixed mortgage rates down – but that hasn’t been the case.
Here’s what you need to know when renewing your mortgage this year.
Variable rates vs. Fixed rates
A quick explanation of variable versus fixed rate mortgages.
Variable rates are tied to the Bank of Canada’s key interest rate and typically move in lockstep when the central bank raises or lowers its interest rate. That affects the interest rate on a variable rate mortgage, or on a home equity line of credit.
Fixed rate mortgages are influenced more by the bond market – in particular five-year government of Canada bonds.
In both cases the bank borrows money at rates slightly higher than the government rate, and profits from the spread between their borrowing and lending rate.
With that out of the way, how should homeowners facing a mortgage renewal this year tackle their decision? Mortgage renewals typically come down to timing. No one is going to successfully select and carry the lowest possible mortgage rate throughout their entire term.
That’s why I adopt a mortgage renewal approach that looks for the lowest of either the five-year variable rate mortgage, or a 1-2-year fixed rate mortgage.
My thought process is that if a large variable rate discount (prime minus 0.8 percent or better) isn’t available, then I’ll take a short-term fixed rate and hope for better variable terms in another year or two.
This process has served me well over the life of my current mortgage. I started with a five-year variable rate of prime minus 0.8 percent, which gave me a rate of 2.15 percent in 2011. One rate cut took that down to 1.90 percent for some time.
Variable rate discounts had all but dried-up when it came time to renew in 2016. Our bank was offering a measly prime minus 0.10 percent (2.6 percent at the time). So, I opted for a 2-year fixed rate mortgage at 2.19 percent.
Fast forward to 2018 and those sweet variable rate discounts came roaring back. I once again chose a five-year variable mortgage rate – this one at prime minus 1.15 percent. With the recent Bank of Canada cuts my mortgage rate is now an incredibly low 1.45 percent.
How does this help you?
If you’re renewing your mortgage, start with the basic premise that borrowers who choose a variable rate mortgage typically save more money (nine times out of 10) than fixed rate borrowers over the life of their mortgage. Then add the idea that negotiating your rate often is a good thing.
Finally, understand that in some years the variable rate discount is largely non-existent, and so it’s not a bad idea to go with a short-term fixed rate so you have the opportunity to hunt for bargains again in the near future.
Renewing Your Mortgage This Year?
I reached out to Rob McLister, mortgage expert and founder of RateSpy.com, to ask specifically what else homeowners should be looking for when it comes to renewing your mortgage this year.
Rob’s on the ground dealing with mortgage applications and he understands both the interest rate and lending environment we’re facing right now.
Should I shop early and take advantage of rate holds?
Mortgages are taking longer to close in some cases due to COVID-related inefficiencies. Make sure you apply to renew your mortgage at least 35-40 days before renewal.
It typically pays to lock-in a rate sooner than later in case rates shoot up. But, in a recession where the government is adding massive amounts of liquidity to the system, there’s less chance of rate spikes.
There’s a greater probability in the near-term that interest rates just drift sideways or move lower as bond investors price-in falling growth and deflation risk, and as investor demand for mortgages improves in the mortgage funding market.
Should I go with a fixed or variable rate?
Well-qualified borrowers can pick up five-year fixed rates as low as 2.14 percent, and variable rates as low as 1.95 percent.
Uninsured borrowers (applies to purchases of $1M or more, rental properties, or amortizations longer than 25 years) are finding as low as 2.44 percent fixed and 2.25 percent variable.
The upfront edge of a variable rate has faded significantly in the last month or so. To put it another way, you’re now paying a lot less for fixed-rate “insurance.”
Typically that happens when the market expects rates to stay low for a few years or more. But humans, being risk averse creatures, tend to weight risk management more heavily than historical rate patterns. As a result, we could see a shift towards fixed rates until that spread between fixed and variable rates — or long-term and short-term rates — widens out more.
At this point, someone going variable would have to be very comfortable with the potential of a 75-100 basis point rate increase in a few years. In fact, if we get more than one rate hike anytime in the next three years, a 5-year fixed rate mortgage would outperform based on interest costs alone.
But the conversation doesn’t end with interest cost. You’ve also got to factor in prepayment penalties, which can be two to four times worse with some five-year fixed rate mortgages, especially at the top 10 banks. Penalties factor in if you move or refinance and can’t get good rates from your existing lender, or if you sell and don’t re-buy soon after.
My existing rate is extremely low. Should I still consider locking-in a rate now?
Variable-rate discounts have slowly improved after almost disappearing in March. At the time, investors were panicked over a potential surge in credit risk. Today, the government is buying mortgage and fixed-income assets by the billions and risk premiums have subsided. That’s pushed down lending costs and banks are starting to pass the savings back to borrowers.
We’re not out of the woods yet, however. Credit risk and rate premiums could always flare back up, but the probability is now greater that variable rates will improve by September.
If I had decided to go variable, then I’d wait as long as I could to set my rate, and ask a mortgage broker to inform me immediately if rate discounts start to shrink again.
If a five-year fixed were more suitable, I’d keep an eye on bond yields. If Canada’s 5-year government bond yield closed above 0.60 percent then I’d apply immediately to lock-in a rate hold.
What’s the rate and lending environment today, compared to five years ago?
Five years ago (May 2015) the average 5-year fixed rate was 2.64 percent at the major banks. Today it’s exactly the same at 2.64 percent. There is virtually no renewal risk for qualified borrowers closing on a fixed rate mortgage in the next few months.
For variable-rate borrowers, they’re seeing about a 20 basis point reduction in rates versus five years ago.
Unfortunately, not everyone is a well-qualified borrower, especially with COVID impacting people’s employment. For anyone renewing near-term who’s seen income interruption or has other credit challenges, you may be better off just renewing with your existing lender.
But talk with a mortgage broker to make sure there’s not a better option given your circumstances.
Final Thoughts
There’s a lot more that goes into a mortgage decision than simply getting the lowest interest rate. There’s variable rates versus fixed rates, short terms versus long terms, not to mention other mortgage features such as pre-payment and double-up privileges, and pre-payment penalties to consider as well.
Not to mention your own personal financial situation. How stable is your income? Has anything changed since your last term, such as marriage, children, divorce, or a career change that may impact your finances today?
Whether you’re renewing your mortgage with a fixed or variable rate term, know that interest rates are still at historic lows and well under 3 percent. As long as your finances remain in good shape, you can renew your mortgage with confidence without agonizing over 10 or 20 basis points.
I check my credit card statements often and yesterday noticed a charge of $500+ from Amazon.ca that was linked to my wife’s card number (secondary cardholder on this account). This was strange, not only because we didn’t authorize the purchase but also because this particular card was not linked to our Amazon account.
What we discovered was that someone opened an Amazon account under my wife’s name, with our home address, and added her credit card number to the account. The fraudster ordered a $500+ fitness watch, and, get this, had it shipped to our address (not due to arrive until later this week).
I contacted the credit card company to flag the unauthorized transaction and report the identity fraud. Mastercard offers Zero Liability protection, meaning the company won’t hold you responsible for unauthorized transactions. They also closed down my wife’s account and issued a new card number.
We contacted Amazon to report the unauthorized charge and investigate how this might have happened. The customer service agent was able to trace the card number to an account that was opened earlier in the week under my wife’s name and address, along with the purchase of a fitness watch.
The strangest part about this entire situation is that the item was shipped to our home address (good job, thief). The Amazon rep asked us to refuse the shipment when it arrived, and then it would issue a refund (a moot point, since the charge has already been reversed on my card statement).
In the meantime I asked if they could flag the account as fraudulent and not allow any further activity, to which they agreed.
Given the number of data breaches that have occurred over the past several years it’s no surprise that eventually one of us would fall victim to identity fraud or theft. My wife’s information could have been compromised at one or more of the largest data breaches in the world, including Adobe, Marriott, and My Fitness Pal.
We reported the identity fraud details to the Canadian Anti-Fraud Centre, which collect information on fraud, identity theft, and past and current scams.
Finally, we placed a potential fraud alert on my wife’s credit file online through TransUnion. The other credit reporting bureau, Equifax, which ironically had a data breach of its own that affected 147 million consumers, had no such online mechanism and its offices were closed for the weekend.
It can be scary to have your information compromised, but this type of identity fraud is becoming more and more prevalent today. Be sure to diligently check your credit card statements and report suspicious transactions immediately.
Both Visa and MasterCard have Zero Liability protection, while American Express offers a similar Fraud Protection guarantee.
Interac also offers fraud prevention, but a credit card’s protection is much more robust. If your bank card is compromised, the fraudster is taking money directly from your bank account, whereas an unauthorized credit card charge still has a 22+ day grace period before payment is required.
This Week’s Recap:
As I mentioned in last Monday’s update, I received the lump sum payment of cash from my pension and put $30,000 into my TFSA, and another $3,700 into my RRSP to fully max out both accounts.
We also bought a hot tub(!), which will be delivered and installed in the coming weeks. Yes, we’re living our best stay-at-home life.
This week I wrote about commission-free trading and whether this is leading to bad investor behaviour (yes, and no).
Watch for my article on tax loss harvesting this week, plus a look at renewing your mortgage in this strange rate environment.
Promo of the Week:
I consistently get questions from readers about high interest savings accounts and where to park your money. The first answer is, not with a savings account at a big bank.
And, if you don’t want to bother moving your money around every 3-6 months to chase the latest interest rate promotions, you’re better off finding a bank that can offer a consistently high everyday rate.
That’s where EQ Bank comes in. EQ Bank’s Savings Plus Account consistently offers an everyday high interest rate at or near the top of the market with no hassles (2%). It even comes with some chequing account functionality, like bill payments and free e-Transfers. Open an account here.
Weekend Reading:
Our friends at Credit Card Genius offer 37 money saving tips when times are tough.
One of the bigger revelations at this year’s Berkshire Hathaway annual general meeting was that it sold off its entire stake in the four largest U.S. airlines in April:
“We made that decision in terms of the airline business. We took money out of the business basically even at a substantial loss,” Buffett said. “We will not fund a company that — where we think that it is going to chew up money in the future.”
Many thanks to Erica Alini at Global News for including quotes from me in her latest piece on changing investment strategies amid COVID-19. Here are my own thoughts on the topic of changing investment strategies in a market crash.
I was also pleased to be included in this MoneySense piece by Jonathan Chevreau on whether you should delay retirement due to COVID-19. Again, here are my own thoughts on whether you should postpone retirement due to the pandemic.
Another MoneySense article looks at how the coronavirus pandemic could change the way we think about retirement in Canada.
I enjoyed this video by Millionaire Teacher Andrew Hallam where he explains how difficult it is to pick winning individual stocks:
Michael Batnick explains the catalyst behind the stock market wrapping up its best month in more than 30 years:
“Stocks aren’t rallying because of terrible numbers. They fell in anticipation of them. For the last few weeks they’ve been rising in anticipation of the recovery.”
My Own Advisor Mark Seed teams up with fee-for-service planner Owen Winkelmolen on the following case study: spend more or retire earlier in this bullet-proof retirement plan.
Dale Roberts at Cut the Crap Investing weighs-in on reports that robo-advisors are thriving in this market downturn.
Michael James looks into another emotional reason why people seem to want to take CPP early.
Group RESP customers are typically locked into monthly payments that are difficult to reduce or postpone. FAIR Canada is calling on security regulators to assist group RESP subscribers who may be unable to make their scheduled payments.
Earn Altitude Prestige status without flying? That’s exactly what Aeroplan and Air Canada are offering right now in this must-see promotion for wannabe frequent flyers.
Finally, many Canadians have turned to meal kit delivery services to help cook from home and limit trips to the grocery store. Kyle Prevost at Million Dollar Journey reviews one of these services – Hello Fresh – and looks at the cost of meal kits.
Enjoy the rest of your weekend, everyone!
The evolution of self-directed investing through discount brokerage platforms has driven the cost per trade down from $29 a decade ago to $9.99 at big bank brokerages today. Some discount brokers (like Questrade) offer free ETF purchases, and one platform – Wealthsimple Trade – even offers commission-free trading of stocks and ETFs with no account minimum.
To be clear, this democratization of stock and ETF trading is a net positive for DIY investors who can contribute to their portfolios more frequently without worrying about incurring hefty trading fees. But there’s a downside to commission-free stock trading that has been brought to light during the coronavirus pandemic.
The Wall Street Journal reported that online brokerages are seeing record spikes in new accounts and trading activity in recent weeks. The authors argue that this trend is due in part to the industrywide move to zero-commission trading through platforms like E*Trade and Robinhood, and exacerbated by the fact that many individual investors have more time on their hands to trade as they work from home.
“Many are young and first-time traders confronting the first economic downturn of their professional lives. Yet with free trading at their fingertips and massive online communities with which to discuss trading ideas, many figure they have little to lose.”
Robinhood has amassed more than 10 million users since launching in 2015, with a median client age of 31. Nearly half of its users are first-time traders.
This article uses American data, where commission-free stock trading has been around for some time. Canada is slightly behind the times, but Wealthsimple Trade has seen a similar trend north of the border. Its clients are trading into this volatile market to a staggering degree.
This graphic shows the most traded stocks on Wealthsimple Trade this quarter. Aurora Cannabis led the way in January and February, before being overtaken by Air Canada at the end of March.
We tracked the most-traded stocks on Wealthsimple Trade this quarter and the results couldn’t be more appropriate for today. pic.twitter.com/p4sDN6r6JS
— Wealthsimple (@Wealthsimple) April 20, 2020
So what is going on here?
Obviously young investors have been drawn to the commission-free platform and they’re looking to hitch their wagon to the fortune of individual stocks that have either been hammered (Air Canada, Aurora Cannabis), or that have a compelling story (Shopify, Tesla).
But is this a new trend driven by more accessible stock trading platforms? Hardly.
For every story I’ve heard recently about investors losing their shirts trading oil ETFs, I can recall similar stories in the late 90s of investors day trading from their college dorm rooms and losing it all when the technology bubble burst.
Speculators at that time were not dissuaded by trading commissions – not with the allure of easy profits to be made on the latest internet stock.
I hope this is a chance for investors to learn some tough lessons about investing (betting) on individual stocks in hopes of turning a quick profit. After all, the worst thing that can happen to a young investor is to have early success trading stocks. It’s not a path to riches over the long term – but just a matter of luck and being in the right place at the right time.
Why I Chose Commission-Free Trading
I invested in individual stocks for years and had some success – mostly because I started trading in 2009 when stocks began their incredible bull market run. I came to my senses in 2015 and switched to index investing, due in no small part to some of my energy stock picks getting cut in half.
Back then, at $29 a trade, I’d sensibly save up at least $3,000 before pulling the trigger on a purchase. When commissions fell to $9.99, I felt more comfortable putting $1,000 to work at a time.
The way I see it, commission-free stock and ETF trades allow investors to put very small amounts into the market right away. And that’s a good thing. It’s what drew me to switch from TD Direct Investing to Wealthsimple Trade. Since then, I’ve bought as little as $100 worth of VEQT in my investment portfolio.
Commission-free trades have been a great evolution in the low cost, self-directed investing journey. It’s especially great for passive investors who invest in a portfolio of ETFs. We can add small amounts to our portfolio and invest right away. We can rebalance for free by selling the ETFs that have risen in value and buying more of the ones that are lagging behind.
But I can certainly see the pitfalls of commission-free stock trading. The barrier to entry is almost zero, making it easy and affordable for new investors to start trading. That can be a dangerous experience for a novice investor.
Most of these cautionary tales are aimed at new investors, but there’s also the core-and-explore cohort who can get caught up in trading stocks – especially when it’s free to do so.
A Wealth of Common Sense blogger Ben Carlson shared his not so common sense strategy of having what he called a fun portfolio. This is where he’d allocated 5 percent of his portfolio to picking stocks to “scratch an itch to take more risk”.
Some of the lessons learned from this ‘fun portfolio’ during the market crash was checking on the performance way too often (daily), and buyer’s remorse or second guessing market timing decisions.
These are just some of the reasons why, in the second edition of Millionaire Teacher, author Andrew Hallam removed “the 10% stock picking solution … if you really can’t help yourself” from his nine rules of wealth.
Final Thoughts
I’m all for lowering costs and making it easier for investors to trade. Sure, there are pitfalls to avoid when it comes to commission-free trading, but I’d argue that the positives outweigh the negatives in the big picture.
Trading commissions didn’t stop day-traders during the tech bubble, and didn’t stop speculators from trading distressed stocks during the great financial crisis in 2008.
Moreover, it’s unfair to paint this as a generational issue. Yes, young investors may be drawn to commission-free and mobile-only platforms like Wealthsimple Trade, but it’s not just Millennials who got burned trading cannabis stocks. Clients of mine in their 60s lost 95 percent of their non-registered investments betting on weed stocks.
My takeaway from this data is not to avoid commission-free trading platforms but for self-directed investors to stop gambling on individual stocks and instead invest in a low cost portfolio of ETFs.