• Usually when I get a new client, the question invariably comes to Variable or Fixed? Soon after though, rates become the centre-point of the discussion, but as a good mortgage provider, I always steer them back to the questions they should be asking first, such as “is Variable or Fixed the right way to go?”

    It is up to me to provide them the answers to whether Fixed or Variable is right for them. In order to do this, I must look at the following factors.

    Income

    First I look at at my clients’ Income:
    • Is the borrower’s income stable and reliable?
    • Is he/she employed full-time or self-employed?
    • Do they see any income interruption in the forseeable future? Ie. planned pregnancy, seasonal employment, etc?
    • Does my client earn enough to afford a variable-rate mortgage? If rates rise, can he or she afford it?

    Liabilities

    Next, I look at the Liabilities that my client has:
    • Does my client have reasonable debt ratios? Keeping in mind that TDS (Total Debt     Service) should be under 40% based on the current posted 5 year rate. If the rate jumps up another basis point – do they still have room in their TDS if this happens?
    • Can he or she afford higher payments if rates creep up to 4% or even higher?

    Assets

    The other side of the coin is their Assets:
    • What assets does my client own? Do they own other properties, vehicles, RRSP’s, Stocks, etc to offset their existing liabilities?
    • Does my client have at least two existing trade lines, which are not above the 75% limit threshold and does he or she not have late payments or R ratings?
    • Does my client have liquid assets that can be used in case of a job loss or illness? The minimum is usually 6 months.

    Equity

    How much Equity do they have?
    • If my client owns his or her own property, do they have enough equity to refinance or do an equity take-out to buy another property?
    • Do they have equity in their present home to consolidate and refinance their debts?
    • What is their Loan to Value that I am working with in contrast to their existing Equity?

    Other Factors

    Other questions also come into play, such as:
    • What is the client’s risk tolerance?
    • Do they live by a budget each month and can they afford a rise in payments if it were to happen?
    • Does he or she understand the difference in interest costs over time between Fixed and Variable?
    • Do they forsee breaking their mortgage before the term ends? – this is a big one! If a client is on a Variable mortgage, they will be hit with only 3 months interest penalty to break their mortgage early, however if on a Fixed mortgage, they will be looking at the IRD penalty, which is the difference between the posted rate and the discounted rate and each lender has their own way of calculating this penalty. Some lenders’ IRD calculations, can run you into the thousands. Knowing the possible calculations before can save you thousands and help you make your decision.
    • Finally, if a client is still confused, I run a cost comparison of Variable vs. Fixed, based on present and future rate assumptions. Nothing is set in stone but it helps to have all of your choices presented clearly.

    Whether you choose Variable or Fixed, the decision must be clear for you and you must work with a mortgage professional, who will clearly outline the differences for you so you can make the right decision in the end – knowing and making the right decision, based on the factors above, can end up costing you or saving you more than you bargained for!

    To your Wealth!
    Amina