Money123: Variable or fixed mortgage? How to decide

Variable rate is in the cards again

Few homeowners faced financial pressures during the Bank of Canada’s interest rate hiking cycle like those with a variable-rate mortgage.

Variable mortgages, which see the contract rate rise and fall with the central bank’s rate decisions, became immediately more expensive as interest rates rose nearly five percentage points over the past two years.

But for prospective buyers and homeowners with mortgages up for renewal, experts say a variable rate mortgage can be considered today depending on your risk tolerance.

Variable rate mortgages might be more expensive than three- or five-year fixed options right now, but with hope for interest rate cuts on the horizon, it’s a “good environment” to consider the variable route, says Ratehub.ca co-CEO James Laird.

But if you do go variable, Laird tells Global News it’s important to have some buffer room built in, just in case the Bank of Canada doesn’t cut rates.

“Variable (mortgages) do require a degree of financial flexibility and some comfort with a higher risk profile,” he says.

Read on here to find out what mortgage options are offering the “sweet spot” for homeowners right now.

Rent growth is ‘unsustainable’

Experts say the pace of rent growth is becoming “unsustainable” in markets often considered more affordable than Canada’s biggest cities.

Rentals.ca data released this week showed that while the average asking rent was down annually in Vancouver and Toronto last month, cities including Calgary and Edmonton saw the biggest spikes.

Alberta has recently been a hot destination for residents of more expensive housing markets like Ontario to relocate for a more affordable life.

But David Dale-Johnson, executive professor of real estate at the Alberta School of Business, tells Global News that the movement of people from other parts of Canada to Alberta means the housing crisis is being spread out through the country, instead of easing.

“That now means we better darn well build some more housing in Alberta, because if those rent increases continue, they’re going to be unsustainable here as well,” he said.

An RBC report released this week also showed that the wealth gap between renters and homeowners is widening, thanks in no small part to housing unaffordability.

Read more on the consequences of this growing divide for renters.

Spring travel tips

Some Canadians are planning to spend more on travel this year despite consistent cost pressures, but experts say there are still ways to vacation without breaking the bank.

A report published this week by American Express looking at global travel trends showed that 36 per cent of Canadians surveyed plan to spend more on travel in 2024 compared with last year.

“Regardless of the mortgage rates, regardless of inflation … people are travelling and they are travelling in numbers that we haven’t seen since pre-COVID days,” said David Dale-Johnson, executive professor of real estate at the Alberta School of Business.

Canadians are increasingly turning to “travel hacks” to save some money on their next trip according to the American Express poll.

One in five (20 per cent) Canadians said they will book through companies that offer complimentary hotel benefits, such as room upgrades and hotel credits.

Here’s what else travel experts are saying about how to save on travel beyond the spring.

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– THE QUESTION –

“I am a 49-year-old woman who came to Canada 11 years ago. I am currently working. I know that my retirement pension plan estimates my pension based on a factor 90. I will be short by the time I will be eligible to retire, with a factor of 86 and 65 years old. What should I do now to increase my income once I am eligible to retire other than work another four years to get my full pension? Currently, I am contributing to a TFSA as savings. Should I start an RRSP? Should I contribute a certain amount of additional voluntary contributions to my retirement plan? How can I supplement my income for the future?

— A Money123 reader 

“There is no magic to reaching the ’90 factor’ with your pension. Retiring before that just means you get a bit less. Reaching it means that you get an “unreduced pension” for the full amount of the pension formula.

The 90 factor is your age plus years of service when you retire. In your case, this is age 65 plus 21 years service, or 86. You gain two years toward your 90 factor every year, since your age and years of service both increase by one. You will be four short, so working two more years should get you the ‘unreduced pension.’

If you retire before you reach the 90 factor, a reduction formula kicks in. The reduction is usually about five per cent per year that you retire early. Since retiring at age 65 for you is two years early, your pension should be about 10 per cent less than the full pension. This is somewhat less, but not the end of the world. The question for you is would you work two more years to get that extra 10 per cent?

Your pension should only be part of your retirement plan. From our experience preparing retirement plans, most people with a government pension need more than just the pension, especially if they are married and they don’t both have a government pension.

The general rule of thumb is that your pension plus CPP should give you about half of your earnings just before you retire. In your case, it will be less, since you have only 21 years. The formula is usually: two per cent/year x the average of your best five years. ‘The average of your best five years’ is about what you earn your third last year before you retire. With two-three per cent inflation, you may be earning about six per cent less that year. Your pension should be: two per cent x 21 years service x your earnings in your third last year (about six per cent less than your final earnings) = about 36 per cent of your final year’s earnings. That is then reduced by about 10 per cent with the reduction formula, to give you a pension of about 32 per cent of your final year earnings.

These ‘defined benefit’ pensions are ‘integrated with CPP,’ which means the formula tells you how much you get from the pension and CPP combined. Your pension usually reduces at age 65 by an estimate of what CPP will pay.

In addition, you get the Old Age Security (OAS), which is about $8,500/year now. However, you will have been in Canada 27 years when you turn 65, not the 40 years required to get the maximum OAS, so you should get a bit less than $6,000.

In total, your three pensions should be about 32 per cent of your final year’s earnings plus about $6,000 each year. Is that enough for you?

The best advice is to get a professional retirement plan to help you figure out the retirement lifestyle you want and the best way to get there.”

–  Ed Rempel, fee-for-service financial planner & tax accountant, Unconventional Wisdom

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