Fixed rate outshines variable
Studies show that since 1975, borrowers benefitted from choosing variable rate mortgages over fixed rate mortgages 84% of the time. It’s still true today, yet most borrowers now opt for a fixed rate loan. Why?
In 2010, we started to see a shift in borrower preferences when mortgage industry surveys indicated that new business consisted of 68% fixed rate loans, 27% variable rate loans, and 5% of combination rate loans. At that time, the lowest variable rates charged were 3.03%, but the lowest fixed rates were 5.15%. With over a 2% difference, it made sense for borrowers to select a variable rate, which they did.
Fast forward to 2014 and the picture is different. Fixed rate mortgages now amount to 82%, and variable rate loans are 9% of the market with combination rate mortgages making up the last 9%.
Today, borrowers can expect to pay about 2.5% for a variable rate mortgage or 2.99% for fixed. It appears that there is no more room for potential decreases in fixed rates. In addition, the short fixed rate spike experienced in late 2013 jolted many consumers to trade off their variable rate loans for fixed terms, even as that temporary market adjustment corrected back to historical lows.
What will your members want in the future?
As long as fixed rates remain historically low, members, especially first time homebuyers, will want fixed rate loans. The assurance that comes from fixing monthly payments will likely outweigh the potential savings of variable rates, especially for borrowers who have limited budgets and little extra capacity.
Combination or hybrid mortgages are an interesting option that may appeal to those members who want to manage their mortgage more actively; however, there are risks with this product as well. A borrowers’ effective amortization may swing dramatically if floating rates rise, and payment amounts don’t follow.
Whatever rate type your borrowers select though, you can be certain that they will be better informed than ever before, and will expect to have all the choices available at your credit union.
With residential mortgage solutions at Concentra, we can enhance your earnings and help you to fund the mortgage preferences of your members.
Laurie Rohatyn, Manager, Residential Markets