Money123: Cottage, condo or freehold for a 1st home, variable mortgage pain, inflation up

Rural, urban or suburban?

Location, location, location — it’s the first, second and third question facing prospective homebuyers looking to break into the property market.

For this month’s instalment of Home School, the series that teaches Canadians everything they need to know about buying a home that they never learned in the classroom, Global News looked at the financial and lifestyle trade-offs to be made whether you’re buying a condo, a freehold property or even a cottage.

Mark Pedlar, a Realtor in Grand Bend, Ont., argues that with the remote and hybrid working arrangements lingering from the pandemic, many young families are in a position where commuting 45 minutes to nearby London from the traditional cottage town is more viable than ever.

That’s particularly relevant to the many Canadians priced out of the housing market as of late with the recent increases in interest rates. Grand Bend’s recreational market is more geared toward buyers these days, Pedlar argues.

But he notes that buying a cottage to rent out or even to live in year-round makes home-buying calculations a bit more complicated.

“You’ve really got to manage your money, and manage your expectations, when looking at these things,” he tells Global News.

Read more on how the home ownership thought process is changing.

Variable mortgages costing Canadians

For many Canadians buying in the housing market over the past few years, variable-rate mortgages were a cheap and popular choice.

But a recent analysis by Rates.ca shows just how much those buyers are paying after 10 interest rate hikes from the Bank of Canada.

The company compiled data looking at the difference between fixed and variable rate mortgages, using an example of a five-year insured mortgage of $500,000 taken out in July 2021. The fixed-rate mortgage had a rate of 1.99 per cent, while the variable-rate mortgage was at 1.25 per cent.

Variable-rate mortgages would have faced 63 per cent more in interest costs than their fixed-rate counterparts over that time, the analysis found, costing $23,579 more to date than if the central bank rates had remained unchanged.

But some mortgage experts who spoke to Global News say it’s not cut and dry that variable mortgages are the more expensive options — even for those buying today.

Read more on whether the risk of variable-rate mortgages is worth it.

Inflation’s up to 4%. Why?

Inflation took a “significant step away” from the Bank of Canada’s two per cent target in August, according to economists reacting to the latest consumer price index data from Statistics Canada this week.

Annual inflation accelerated to four per cent in the month, a jump from the 3.3 per cent seen in July. Higher gas prices and more expensive shelter costs, particularly for mortgages and rent, were blamed for the increase.

There was a silver lining at the grocery store — finally — as aggregate prices for food declined month-to-month.

Prices for fresh fruit, chicken and cereal products grew at a slower pace last month than in July, according to StatCan, while costs for beef, coffee and tea, and sugar and confectionaries accelerated.

Economists said the Bank of Canada is in a tough spot heading into its next decision on Oct. 25, but most said the central bank will wait to see how other economic indicators pan out before deciding to hike or stay on hold next month.

Read more about the rise in inflation and the decision the Bank of Canada faces.

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– THE QUESTION –

“My mortgage is up for renewal in a few months. I’m wondering about fixed vs. variable right now. I’ve talked to someone at my bank and I’m fairly sure I can handle the rates on either when I renew, even if interest rates go up again, but am trying to be ready for when cuts start to get a better rate. Would I be better off with a one- or two-year fixed rate, or a variable that will drop as soon as interest rates go down? My agent (and partner) seem to think shorter-term fixed is a better bet but looking for a second opinion.”

— A Money123 reader 

“Thanks for the question. You’re in a great position for a few reasons: 1) you can handle either rates when you renew and even if rates go up again; 2) you have a confidant who you can bounce ideas off of; and 3) you’re asking Global News! I feel that far too few people talk enough about their finances (it shouldn’t be a taboo subject) and getting additional support and opinions is very important.

Now to your question: should you go with a one- or two-year fixed rate or a variable? Well, it depends on the current rates and your preferences. You’ve mentioned that you can handle fluctuations in interest rate, which allows us to consider the variable, and you’ve mentioned the possibility of rate drops and locking into a one or two year. Both of these make it seem like you think rates will be better in a year or two. I agree that rates should be better in a year or two.

So, let’s take a look at the rates…

At this time, the average one-year and two-year fixed rates are 7.04-7.29 per cent and 6.79 per cent and 7.19 per cent, respectively (let’s use the lowest rate). The variable rate is as low as 6.30 per cent (insured/insurable rates have been used as of September 21, 2023).

If we were to compare a one-year or a two-year at 7.04 per cent or 6.79 per cent versus a 6.30 per cent rate, the variable looks like the winner. Yes, it’s possible that the variable will increase in the short term, but any increase will likely be (guessing here) only a 0.25 per cent raise, making your rate 6.55 per cent. This rate is still lower than the one- or two-year rate and you would have also started off at a lower rate and lower payment. Further, should rates decrease, the variable would allow you to “lock in” your variable into a fixed rate at any time. So in the case that you described, based on the available interest rates and your ability to withstand rate fluctuations, I would advise for the variable rate.

However, and for most people, the variable is riskier because, well, it’s variable. One should take a fixed rate (or a longer-term fixed rate) if they can’t sleep at night knowing that the variable rate could increase further or are worried about rates staying high in the short term.”

–  Eitan Pinsky, owner, Pinsky Mortgages

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