Variable-rate mortgage best bet if tariffs ‘torpedo the economy’

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With Canadians on tenterhooks over Donald Trump‘s looming tariff war, now might not seem to be the best time to take a chance on a variable-rate mortgage. 

Then again, maybe it is, says one economist.

“With borrowing costs more likely to fall than rise — and by a lot in a possible trade war — a floating rate mortgage could pay off,” said Sal Guatieri, senior economist with BMO Capital Markets, in a recent report. 

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The Bank of Canada has cut its interest rate from 5 per cent to 3 per cent, and with the prospect of more cuts ahead, variable-rate mortgages are gaining in popularity.

About 1.2 million mortgages will renew this year, most of them at a higher rate, said real estate company Royal LePage in a report out this morning.

Almost 30 per cent of those homeowners said they would choose a variable rate on renewal, up from 24 per cent now on a floating rate. Sixty-six per cent said they would renew on a fixed-rate loan, down from 75 per cent now locked in, the Royal LePage survey found. 

“For homeowners looking to reduce their monthly payments or pay down their principal faster, variable-rate mortgages have become an increasingly attractive option in light of today’s declining rate environment and the likelihood of further cuts this year,” said Royal LePage chief executive Phil Soper.

If the Bank of Canada cuts 25 basis points in April and again in July to 2.5 per cent as BMO expects a “floating rate could pay off handsomely,” said Guatieri.

BMO estimates a borrower putting 10 per cent down on a $500,000 home over 25 years could save an average of 40 bps a year on a variable rate over a fixed. That would work out to savings of over $100 a month or more than $6,000 over five years.

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If “a trade war torpedoes the economy,” the Bank of Canada could slash rates as low as 1.5 per cent, increasing the savings for borrowers on a floating rate, said Guatieri.

If that rate stuck for a full year, variable-rate borrowers would save another 29 bps in five years, or an extra $74 a month, he said.

However, any forecast these days is beset by uncertainty. The Bank of Montreal and the markets agree that the bank is likely to cut another 50 bps, but there is always the chance it stands pat, Guatieri said. Or if a trade war is averted and the economy improves, the central bank may even raise rates.

“In this case, a fixed rate would clearly be the better choice,” he said.

There is another option. Taking out a fixed-rate mortgage of less than five years would give borrowers the opportunity to refinance at a possibly much lower rate in a few years’ time, he said.

Based on BMO’s interest rate forecast, a fixed-rate mortgage could be renewed at a lower variable rate in three years, saving an average of 20 bps a year over five years, compared to the current five-year rate.

Any break Canadians can get on their mortgages will likely be welcome.

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Of those who expect their monthly mortgage payment to rise upon renewal this year, 81 per cent say the increase will put financial strain on their household, said Royal LePage.

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The American greenback is the world’s most traded currency, but it’s also the world’s most counterfeited, according to calculations by FX brokers BestBrokers.com.

BestBrokers estimates that 904,700 fake U.S. notes were detected in 2023 — or 17 counterfeit bills for every million legitimate. That’s nothing compared with the counterfeiting that went on during the American Civil War. In 1865, a third to half of all U.S. currency was estimated to be counterfeit, said BestBrokers.

Canada falls 7th on the ranking of most counterfeited currencies, with 6 fake notes for every million genuine.

The title for the most counterfeit-proof banknote goes to the Swiss 100-franc note released on Sept. 12, 2019. The bill has 20 security features that makes it nearly impossible to fake, says BestBrokers. These include security thread, raised printing, watermark, micro-perforations, infrared properties and UV-visible elements.

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• Today’s Data: Canada industrial products and raw materials price indices
• Earnings: Cameco Corp., TransAlta Corp, Hydro One Ltd., Teck Resources Ltd., Cenovus Energy Inc., Loblaw Cos Ltd., Eldorado Gold Corp., Centerra Gold Inc., Walmart Inc.

Worried about your investments during Trump’s tariff talk? First off, don’t panic, says investing pro Peter Hodson. Stocks globally have survived dozens of trade wars in the past. Read his advice on how to handle the uncertainty and five possible reasons the United States would put tariffs in place. Read more

Calling Canadian families with younger kids or teens: Whether it’s budgeting, spending, investing, paying off debt, or just paying the bills, does your family have any financial resolutions for the coming year? Let us know at wealth@postmedia.com.

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

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Financial Post on YouTube

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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