April 3, 2024 • 5 mins
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EPISODE DESCRIPTION
In this episode, Tom & Brandon explain the differences between two types of variable rate mortgages, adjustable and static, and what you need to consider when choosing them.
What was discussed: → What adjustable rate mortgages are. → What static (variable) rate mortgages are. → And what a "trigger rate" is and what it means if you hit it.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:08):
and what they're hinged on.
So firstly, fixed rates are hinged
on the bond market, the bondyields.
So they fluctuate more often thannot.
And they typically don't make theheadlines in the news.
We have a past episode on this,breaking down how that works.
But today, we're going to focus inthe news.
We have a past episode on this,breaking down how that works.
But today we're going to focus onthe variable.
So the variable is hinged on theBank of Canada.
(00:28):
So typically when you hear in thenews like, hey, Bank of Canada is
increasing rates or decreasing,that affects your variable rate
mortgage.
Now, what we're going to talk
about today is really what's thedifference between the two types
of variable rate mortgages,because not just we have one, the
adjustable and we two types ofvariable rate mortgages, because
not just one, we have theadjustable and we have the true
variable rate which is a staticrate.
(00:49):
mortgage, So why don't we diveinto firstly, the adjustable rate
mortgage, Brandon?Sure thing.
So adjustable, it's right in thename, the adjustable rate
mortgage, any decision from theBank of Canada, whether to
increase or decrease the primerate, would either increase or
decrease your mortgage amount.
So how it works is you have a
discount or increase based off ofprime.
So prime 7.2 right now, standardvariable insured would be 7.2
minus 0.9.
So you carry that 0.9 discount.
(01:11):
If the Bank of Canada decides tolower their rate, any decrease
they you make, minus your 0.9discount.
If the Bank of Canada decides tolower their any rate, decrease
they you make, minus your 0.9 fromthere.
And your monthly payment reflectsthis.
Your amortization stays onschedule.
And it can be nice in a decliningrate market because your payment's
going down.
Why this got so much slack over
the past couple of years is wewere in the opposite of this and
(01:34):
we were in a market that washeating up.
And so the people that had thosemortgages, me being one of them,
felt the increase month over monthof their payment up.
Yeah.
So Bank of Canada is what sets
prime.
So like Brandon said, when you
have that discount coming off ofprime, what's fluctuating is the
prime portion of your rate, whichis today 7.2.
That goes up and down, thataffects your net rate, but that
(01:54):
discount remains the samethroughout the term that you
signed on for.
So you hit the nail on the head
with the adjustable.
And as of right now, what we're
suggesting, if you are going to gowith a variable rate mortgage,
like encompassing both of them, wewould probably lean you towards
going with the adjustable becausethen you can ride the wave and
benefit from the rates decreasingin the near future because we will
(02:16):
see some rate decreases.
We don't know when and by how
much, but we will see it withinthe next year.
So that's the adjustable.
Now let's move on to the static.
This is the true variable.
When you see VRM or variable rate
mortgage, this is typically whatit is.
And a lot of banks offer this outof the big six banks.
And a lot of consumers that havesigned on to this during COVID
(02:36):
times, weren't really educated asto how the variable rate mortgage
works.
So you can think of it as a static
payment because it is a staticpayment that doesn't change.
Even if prime goes up and downfrom the Bank of Canada.
Yes, your rate changes on the backend, but your payment doesn't
change.
It stays static throughout unless
you actually manually change yourrate.
So the one thing you really wantto be careful of, if you don't
(02:58):
increase your payment while we aregoing through periods of times
where the Bank of Canada isincreasing rates, then you can hit
what's called the trigger rate.
So why that affects people?
Yeah, so trigger rate isessentially you're going to a
point where you're no longer evencovering the interest of your
mortgage.
One precursor to that is well,
your payment doesn't change.
(03:19):
The amortization on the back end
is constantly growing.
So you might start at a 25 or 30
year amortization.
And all of a sudden find that
because rates have gone up somuch, now you're at a 70 year or
even higher we've seen.
So it can get pretty scary when
you realize, holy crap, I'm nevergoing to pay this down.
(03:40):
And it gets scary for the lenderas well because they're like, wow,
we're never going to get the moneyback from this person.
So they put in a trigger rate sothat they can either have you make
a lump sum payment or catch upyour payment to where it should be
to bring that amortization back inline and make sure it's not just
like an interest only Yeah,exactly.
And we're not saying that it's abad product.
I think there's a place and timefor it.
And unfortunately, like duringCOVID and post COVID, once we
(04:01):
started seeing those ratesincrease, a lot of people were
affected by it because if they gottheir mortgage through a branch,
typically they probably weren'teducated as to how that product
works.
And a lot of people were hitting
that trigger rate, unfortunately,which they were forced into making
that decision.
Whereas if you played it well
enough that you were in thatvariable rate mortgage and you
were putting additional paymentsdown every time the Bank of Canada
(04:23):
would increase rates, then you'dbe fine because you're not going
to hit that trigger rate.
And I'm a pro variable if it's the
right time and for the rightperson.
And so a good example of thiswould be if you're into real
estate investing, and you want toqualify for more properties in the
future, it's a good way to dothat, because your payment is
going to stay static.
And if rates do increase, as long
(04:45):
as you're maintaining control andyou're not hitting that trigger
rate, your payment is going tostay the same.
You're going to take advantage ofthat low payment, which is going
to allow you to qualify for moreproperties in the future.
So that's a good example ofsomeone that would benefit from
going with the static variable.
Yeah, going with a static when the
rate market's a little bit lower,though.
If you go static now, you'retaking a static product when we're
(05:05):
at a peak cycle, and then you'reactually setting yourself up for
the opposite.
So right now, timing-wise,
adjustable.
If rates come down considerable,
we would order the traditional VRMor static option.
And at that point, you kind of getthe best of both worlds because
you can ride this down.
If you go static
and what they're hinged on.
So firstly, fixed rates are hinged
on the bond market, the bondyields.
So they fluctuate more often thannot.
And they typically don't make theheadlines in the news.
We have a past episode on this,breaking down how that works.
But today, we're going to focus inthe news.
We have a past episode on this,breaking down how that works.
But today we're going to focus onthe variable.
So the variable is hinged on theBank of Canada.
(00:28):
So typically when you hear in thenews like, hey, Bank of Canada is
increasing rates or decreasing,that affects your variable rate
mortgage.
Now, what we're going to talk
about today is really what's thedifference between the two types
of variable rate mortgages,because not just we have one, the
adjustable and we two types ofvariable rate mortgages, because
not just one, we have theadjustable and we have the true
variable rate which is a staticrate.
(00:49):
mortgage, So why don't we diveinto firstly, the adjustable rate
mortgage, Brandon?Sure thing.
So adjustable, it's right in thename, the adjustable rate
mortgage, any decision from theBank of Canada, whether to
increase or decrease the primerate, would either increase or
decrease your mortgage amount.
So how it works is you have a
discount or increase based off ofprime.
So prime 7.2 right now, standardvariable insured would be 7.2
minus 0.9.
So you carry that 0.9 discount.
(01:11):
If the Bank of Canada decides tolower their rate, any decrease
they you make, minus your 0.9discount.
If the Bank of Canada decides tolower their any rate, decrease
they you make, minus your 0.9 fromthere.
And your monthly payment reflectsthis.
Your amortization stays onschedule.
And it can be nice in a decliningrate market because your payment's
going down.
Why this got so much slack over
the past couple of years is wewere in the opposite of this and
(01:34):
we were in a market that washeating up.
And so the people that had thosemortgages, me being one of them,
felt the increase month over monthof their payment up.
Yeah.
So Bank of Canada is what sets
prime.
So like Brandon said, when you
have that discount coming off ofprime, what's fluctuating is the
prime portion of your rate, whichis today 7.2.
That goes up and down, thataffects your net rate, but that
(01:54):
discount remains the samethroughout the term that you
signed on for.
So you hit the nail on the head
with the adjustable.
And as of right now, what we're
suggesting, if you are going to gowith a variable rate mortgage,
like encompassing both of them, wewould probably lean you towards
going with the adjustable becausethen you can ride the wave and
benefit from the rates decreasingin the near future because we will
(02:16):
see some rate decreases.
We don't know when and by how
much, but we will see it withinthe next year.
So that's the adjustable.
Now let's move on to the static.
This is the true variable.
When you see VRM or variable rate
mortgage, this is typically whatit is.
And a lot of banks offer this outof the big six banks.
And a lot of consumers that havesigned on to this during COVID
(02:36):
times, weren't really educated asto how the variable rate mortgage
works.
So you can think of it as a static
payment because it is a staticpayment that doesn't change.
Even if prime goes up and downfrom the Bank of Canada.
Yes, your rate changes on the backend, but your payment doesn't
change.
It stays static throughout unless
you actually manually change yourrate.
So the one thing you really wantto be careful of, if you don't
(02:58):
increase your payment while we aregoing through periods of times
where the Bank of Canada isincreasing rates, then you can hit
what's called the trigger rate.
So why that affects people?
Yeah, so trigger rate isessentially you're going to a
point where you're no longer evencovering the interest of your
mortgage.
One precursor to that is well,
your payment doesn't change.
(03:19):
The amortization on the back end
is constantly growing.
So you might start at a 25 or 30
year amortization.
And all of a sudden find that
because rates have gone up somuch, now you're at a 70 year or
even higher we've seen.
So it can get pretty scary when
you realize, holy crap, I'm nevergoing to pay this down.
(03:40):
And it gets scary for the lenderas well because they're like, wow,
we're never going to get the moneyback from this person.
So they put in a trigger rate sothat they can either have you make
a lump sum payment or catch upyour payment to where it should be
to bring that amortization back inline and make sure it's not just
like an interest only Yeah,exactly.
And we're not saying that it's abad product.
I think there's a place and timefor it.
And unfortunately, like duringCOVID and post COVID, once we
(04:01):
started seeing those ratesincrease, a lot of people were
affected by it because if they gottheir mortgage through a branch,
typically they probably weren'teducated as to how that product
works.
And a lot of people were hitting
that trigger rate, unfortunately,which they were forced into making
that decision.
Whereas if you played it well
enough that you were in thatvariable rate mortgage and you
were putting additional paymentsdown every time the Bank of Canada
(04:23):
would increase rates, then you'dbe fine because you're not going
to hit that trigger rate.
And I'm a pro variable if it's the
right time and for the rightperson.
And so a good example of thiswould be if you're into real
estate investing, and you want toqualify for more properties in the
future, it's a good way to dothat, because your payment is
going to stay static.
And if rates do increase, as long
(04:45):
as you're maintaining control andyou're not hitting that trigger
rate, your payment is going tostay the same.
You're going to take advantage ofthat low payment, which is going
to allow you to qualify for moreproperties in the future.
So that's a good example ofsomeone that would benefit from
going with the static variable.
Yeah, going with a static when the
rate market's a little bit lower,though.
If you go static now, you'retaking a static product when we're
(05:05):
at a peak cycle, and then you'reactually setting yourself up for
the opposite.
So right now, timing-wise,
adjustable.
If rates come down considerable,
we would order the traditional VRMor static option.
And at that point, you kind of getthe best of both worlds because
you can ride this down.
If you go static
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