For better or worse, Canadians have a lot of trust. In each other, in their government, in the places they eat, in the places they shop – and apparently in the places they bank. A 2020 survey found that seven out of 10 Canadians believe their banks have their best interest in mind when offering advice. Well, if you’re one of those seven out of 10 people, I hate to burst your bubble… but I have reason to believe otherwise.
Why You Should Question Your Bank
Banks have a well documented history of aggressive sales tactics – which is why you might get a call from your bank pretty soon (if you haven’t already). They’ll tell you that rates are skyrocketing. They’ll tell you variable rate mortgages are a gamble. They’ll tell you that the future of the housing market is uncertain, all the while telling you that they care about your financial future. Then, they’ll come to the rescue with a solution that will make everything okay: a 5-year fixed rate mortgage.
Here’s the sell: rates are still relatively low, but they’re rising quickly. Even worse, they aren’t going to stop rising any time soon. Lock into a 5-year fixed rate mortgage, they’ll tell you, and you won’t have to worry about rate hikes anymore. You’ll have the safety and security of knowing that your monthly payment will be the same every single month.
It’s true that your monthly payments will stay consistent for the entire length of your term. What’s false though is that this is the best option for your long term financial health.
Banks are capitalizing on your anxiety to push one of their most profitable products. That’s right. The 5-year fixed rate mortgage makes WAY more money than any other kind of mortgage product. They know that the economy is going through a transition, and they know that homeowners carrying a variable rate mortgage are feeling vulnerable. It’s the perfect time to sell a product that mitigates people’s perceived risk and anxiety.
Fixed Rates Aren’t the Answer
The truth is, what goes up must come down. Rates are rising, but they can’t keep rising – that would cause a housing collapse similar to the one we saw in 1990. The government knows that, and they have the power to stop it. So they will. Rates will inevitably come back down because they’ll have to.
And yet, that doesn’t stop bankers from selling fixed rate mortgages on the basis that rates are going up and up indefinitely. The reality is that if you stick with a variable rate, your monthly payments will increase. And then they will decrease, as they always do. After five years, you’ll have saved thousands of dollars on borrowing costs by trusting the ebb and flow of the economy.
How Do I Know This?
Simple! We’ve been here before. In 2008, the banks got on the phones just like they are right now pushing their 5-year fixed rate mortgages. Canadians who took the bait were locked into rates as high as 5.50% for 5 years – this is during a time when rates hit lows of 1.35%! Can you imagine missing out on that?
I believe we’re in a similar position to the one we were in 14 years ago. Bond yields are above 3.00% just like they were then, meaning they’re due to come back down. What does this mean? Fixed rates are priced based on bond yields – so those will come down as well. So will variable rates as a result of the Bank of Canada lowering their key interest rate. Just like 2008, this is an anxious time – but rates will inevitably fall. We may not know exactly when they’ll fall, but they will fall. And when they do, the big winners will be the big banks (and, of course, whoever stuck with their variable rate).
The Bottom Line
We trust our banks implicitly, but should we? At the end of the day, they’re businesses trying to make a buck. They know that rates will fall as quickly as they’ve been rising; and they capitalize on the fact that most people DON’T know that. It’s how they make money. As uncertain as these times may seem, the economy is cyclical. Variable rates have always come out on top. So if the bank calls, hang up. Stick to your guns. And as always, if you’re unsure, make sure you speak to an impartial professional who actually has your best interest in mind.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; firstname.lastname@example.org