Fixed or float? Combination mortgages increasing in popularity: RBC poll

According to RBC’s annual 17^th Annual Homeowners Survey, the popularity of combination mortgages which offer both fixed and floating segments is on the rise.  In fact 40% of Canadians who are likely to purchase a home within the next 2 years plan to take out a combination mortgage compared to 32% in 2009.  A combination mortgage is where a certain portion of the mortgage is fixed and the rest is variable e.g. on a $200K mortgage $120K is variable and $80K is fixed. The combination can be 50/50, 60/40 75/25, any arrangement that you like.

The surging popularity of combination mortgages indicates that Canadians are trying to maximize low interest rates while at the same time retaining the security of a fixed mortgage. The poll also revealed a marked gender split with more women (46 per cent) than men (35 per cent) preferring a combination mortgage.

“Although interest rates are expected to rise, our study shows that not all Canadians intend to automatically opt for a fixed mortgage with a longer term,” said Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. “As consumers begin to learn about the benefits of mortgage diversification, we’re seeing more homebuyers gain a better comfort level with adding floating rate mortgage options.”

While combination mortgages are gaining in popularity, fixed-rate mortgages continue to be the most common choice for potential buyers and are preferred by 44 per cent of Canadians likely to buy a home within the next two years. Atlantic Canadians are most likely (54 per cent) to opt for a fixed rate, with Ontarians (41 per cent) least likely to do so.

When current homeowners were asked about the impact of potential interest rate increases, 66 per cent said they were concerned, with women (70 per cent) more concerned than men (60 per cent).

According to CIBC’s Senior Economist Benjamin Tal, he expects the variable mortgage to increase by 1% by the end of the year with the first increase scheduled on June 1 to be between .25% to .50%. By the end of 2011 he expects prime rate to increase by 2.5% to 3%.  When asked why the government would want to increase rates when inflation is relatively low, he said the rate that prime rate that we have right now is called an emergency rate.  The economy although not robust is no longer in an emergency mode and therefore the government needs to restore rates to a more normal level.

Additional mortgage findings from RBC’s poll is broken down below:

Fixed rate mortgages are preferred by:

-   44 per cent of Canadians likely to buy a home within the next two years – down from 47 per cent in 2009

-   54 per cent of Atlantic Canadians (the highest in Canada)

Variable rate mortgages are preferred by:

-   16 per cent of Canadians likely to buy a home within the next two years – down from 20 per cent in 2009

-   19 per cent of men compared with 12 per cent of women

Mortgage term most likely to be chosen by those opting for a fixed or combination mortgage:

-   Five-year term: 43 per cent

-   More than five-year term: 29 per cent

-   Three-year term: eight per cent

63 per cent: the proportion of Canadian homeowners who have mortgages (compared to 56 per cent in 2005)

$124,131: the average amount remaining on Canadian homeowners’ mortgages (compared to $109,504 in 2005)

Also, we just wanted to dispel some common myths that in spite of our recent blogs clients are still confused as to what the new rules mean for Canadians.

Myth #1 – Downpayment has to be 20%.

Not true, as long as you are buying a home for yourself as your principal residence you only need 5% downpayment.

Myth #2- If you want a variable rate mortgage you have to put down 10%.

Again this is false, it is now harder to qualify for a variable rate mortgage or mortgages that have a term of less than 5 years, but the downpayment remains at 5%.

Myth #3- You have to take a 25 year amortization.

False, longest amortization remains at 35 years.

We hope you learned a lot from today’s blog and we welcome your feedback.

Bernadette Laxamana’s Mortgage Update – English Version

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