Credit and Duration Mortgage Story

VMD brought this article to our attention from by Rob McLister: The Incredibly Shrinking Variable Discount

Just weeks ago you could find variable-rate mortgages at prime – 0.80% (P-.80%) or better. Consumers thought they were here to stay, but the tables turned…fast.

Economic troubles and lender profit motives have shrunken variable discounts beyond expectations. Banks are now commonly quoting prime rate, for example, with little discounting.

Once the last few holdout lenders with P-.50% disappear, discounted variables could move towards P-.25%…or worse. Some lenders even suggest that prime or prime plus could be the new normal.

Credit risk seems to have increased of late. Some industry operatives provide some thoughts (emphasis mine):

While variables have cost less than 5-year fixed mortgages a majority of the time in the past, favourites don’t win every game.

More importantly, assumptions are key when it comes to rate studies. Two important factors have impacted the research quoted above:

  1. A multi-decade bias towards falling rates
  2. Use of posted rates (instead of discount rates)

“Interest rates have been trending downward for two decades,” BMO Capital Markets Senior Economist Benjamin Reitzes told us in a recent interview. By default, he says, that’s tilted the table more in favour of variables than it otherwise would be.

Looking ahead, rates are no longer able to drop over one percent. The most we can realistically hope for is an extended period of horizontal rate movement. (The BoC can still cut rates slightly, but the European and American crises and sub-2% core inflation won’t delay hikes forever.)

As a result, Reitzes says, “Going forward, borrowers won’t see the same advantage to variable rates as they have in the past 25 years

The second factor that’s largely ignored when citing rate research is the actual mortgage rates used for backtesting. Each of the three studies above uses posted rates in their historical analysis…

According to [Moshe] Milevsky, “…The historical probability of doing better with the floating rate mortgage…hovered around 70% to 80%” when the borrower used deep discount rates (based on a 1965-2000 study period).

Using today’s discounts, that 70-80% drops to just 53%, based on our findings from 1970 to 2006. (Obviously today’s spreads would not have applied historically but, as Milevsky maintained in his research above, that is beside the point.)

In other words, the fixed/variable decision would have been a coinflip, based on today’s spreads.

Mortgage loan duration decisions is always a hot topic around dinner tables of real estate investors. Given how shallow the long-short mortgage curve is, it’s an even tougher choice now. Still, looking at either 5-year or variable rates, the difference in payments between owning and renting is evidently still tipping some into ownership; October sales in Vancouver are up year-on-year. I get the sad feeling that people are not heeding the Bank of Canada’s reminder about how 30-year-amortized debt remains past a 5-year mortgage term.
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@Anonymous: ….I guess you missed the announcement yesterday. Hint: they float…..

Ya! Just look what building Fastcats did for the BC Ship building industry (not sure they're still floating though – what am I saying – turds always float).


This is not the inflation you're looking for… September CPI +0.2 to 3.2, core +0.3 to 2.2 (highest in 3 years), GDP down to 1.5. Hope this is not a trend, eh?


@jesse: But 2008 had the second highest total of immigration numbers and we all know how that year turned out. There must be something else at play when I comes to sales and prices of RE in Vancouver.

fixie guy

25 jesse Says: "And interestingly a resident on RET pointed out that 37000 immigrants settled in Vancouver area in 2010, about 3000 higher than in 2009."

Also 3000 more than 2001, when the Vancouver housing market was at its lowest point since the 1980's.



"HAM only wants in on investments that go up, not something that drops in value year after year after year."

In other words, they'd rather buy high than buy low, just like every other idiot "investor" in RE or stocks.

That is the stuff that busts are made of.


"And interestingly a resident on RET pointed out that 37000 immigrants settled in Vancouver area in 2010"

Shocking that the third largest city in Canada received the third most immigrants. Whoodathunk.

And with all the immigrants to Montreal their prices must be through the roof.


@paulb.: "Sold Listings 69 yikes!"

Why 'yikes'? We've seen several days where's sell:list is well under 50%.



The crazy thing is that it just might.


"I don’t see any plan to introduce productive industries to BC"

I guess you missed the announcement yesterday. Hint: they float

nino rota

Talked to the friend that lives in west end. They rent a 1 bdr and wife works as assistant building manager. They get discount on the rent. But the problem is that they have already 3 year old and they need bigger place. No 2 bdr in the building. If they leave building they will lose help in the rent. If they rent 2 bdr somewhere else wife has to get a job to pay for additional rent but the problem is a daycare for the kid. They can’t find one. You have to be on the list at least a year. So they are very close to saying F$%$ck it; it is just not worth it staying and bringing up the family in this city.


I'm starting to wonder what this province will be like in the next ten to fifteen years. I don't see any plan to introduce productive industries to BC, and especially the GVRD. Will the province become a sort of retirement village with only wealthy seniors and a minimal staff serving them? Who's going to pay taxes for these people?


Ok, here's an amazing local anecdote. Many people wonder how anybody but HAM can afford a home in Vancouver. I met a family today that is trying to rent out their home on the NS as they are moving to Alberta because it's too expensive here. (They tried to sell the house, but no go). The house is a serious POS, low height suite in the basement, no updating whatsoever. Both parents are working multiple jobs (She's working 2 and he's working 3) and they rent the basement out and have other extended family living with them. They are asking waaaaay to much for the place to cover the mortgage (she admitted this).

I guarantee that this is not an isolated case….


I think US houses will be as popular with HAM as Nortel stocks right before being delisted. HAM only wants in on investments that go up, not something that drops in value year after year after year.


@paulb.: I'm shocked at last couple day's numbers after Oct was showing signs of growing strength


@McLovin: I'll take 69 every day,


re US house Visa:

It's just show how desperate are in the US. what;s next, selling their daughters to anybody who buy a house.


Net 100. I'll take a net 100 everyday untill we hit 25,000!


New Listings 172

Price Changes 110

Sold Listings 69 yikes!



Has anyone noticed that the largely ignored Condo tracker is inching its way higher?



And the IRS means business.

So there is nothing to worry about, Canada with its free social services will still remain Mecca for HAM type investors and their closer and further families. Lovely.



The proposed visa is not a "green card", but seems to be essentially a long-stay tourist visa.

I also wonder how attractive it would really be to rich foreigners given that anyone staying in the US more than 183 days in a year is taxable as a US resident on global income regardless of immigration status. And the IRS means business. Just ask US citizens who live in Canada.

Foreigners immigrating to the U.S. with the new visa wouldn't be able to work here unless they obtained a regular work visa through the normal process. They'd be allowed to bring a spouse and any children under the age of 18 but they wouldn't be able to stay in the country legally on the new visa once they sold their properties.

That's assuming it passes.



I wonder how long you have to hold the house for. If you could sell it a year later, that would be a cheap visa, even factoring in a 10% price drop.