Mortgage advice for 2021: Fixed versus variable rate?


Financial planning experts Heidi Rumohr Janine Rogan give advice on doing taxes mortgage fixed variable rate savings in 2021

Mortgage rates are at an all-time low and Canadians will have to decide whether 2021 is the year to lock in a fixed rate, ride out the variable, pay down their debt, invest or simply save.

Complicating these decisions is the COVID-19 pandemic, which is the reason for the historically low rates to begin with. Canada’s economy isn’t expected to really recover until 2022, vaccination rollout permitting. So 2021 is going to be as much, if not more, of a financial challenge.

According to a recent Ipsos study, four in 10 Canadians are “struggling” at best when it comes to their financial health. Among those people, almost one in five feel they are “sinking” financially. Meanwhile, only one-third of Canadians say they are “thriving.”

To brace for the financial challenges ahead, we asked money gurus Janine Rogan and Heidi Rumohr for advice. Rogan is the chartered professional accountant behind the Wealth Building Academy, a financial literacy program educating Canadians on how to manage and invest their money. Rumohr is a financial services veteran who coaches her clients to shrink debts through her company, Rumohr Financial Services.

As part of our NOW Money series, Rogan and Rumohr will hold our hands through financial decisions. They already gave us tips on filing taxes in 2021 and will be helping with adjusting our lifestyles to save money and feel safe during COVID-19.

But first, we need to figure out how to pivot and adjust mortgages and investments in 2021.

Radheyan Simonpillai: My fixed-rate mortgage came up for renewal before the pandemic really hit and the signs were there that the economy was going to take a hit from COVID-19, so we opted for variable. And right now, we’re paying 1.5 per cent. Do we stick with a variable mortgage or lock in a fixed rate?

Heidi Rumohr: It always depends on everyone’s financial situation. Variable rates historically have usually done better than a fixed term. I have a variable mortgage. That’s what I usually advise clients to pick, especially in this interest rate environment. Nobody has a crystal ball and knows what’s going to happen with interest rates being so low. I suspect they’re going to be low for a period of time until the economy recovers.

Janine Rogan: It’s always impossible to know which way rates are going. I personally did not think that they would get this low. But 1.5 is pretty darn low. If you can lock in something like 1.5, I would definitely say try to do that. I got a mortgage about a year and a bit ago, and we’re locked in at 3.3. And that seems so incredibly high right now.

When the variable mortgage is at 1.5, they’re not giving you a fixed rate of 1.5, right? They’re giving it to you at 2.5 per cent or something, right?

JR: That would depend what your bank is able to offer you. I know some of the fixed rates are getting down there as well.

Given how low the rates are, should people focus on taking advantage of this moment to pay down their mortgages or debts? Or should they consider investing any extra money they can scrape together?

HR: When people put every extra dollar on the debt, paying down credit cards or line of credits, what can happen in some instances is that you binge. Behaviourally we are wired to give ourselves a little pat on the back. “Oh, we did something good. We paid off all this debt. I almost have permission to do something bad.”

A really good example of this is when you’re like, “Oh, I deserve this chocolate bar because I just worked out.” You just cancelled out exactly what you did because you felt like you gave yourself that permission.

We do the exact same thing with money. We donate to a cause. We donate food to a food bank. And then we go and buy something because we’ve subconsciously given ourselves permission to spend money because we did something good.

JR: When I look at personal finance, I always kind of go at it from a balanced approach. Part of what you need to look at is your comfort level with debt. If you’re really, really uncomfortable with having that mortgage debt that you have, then absolutely focus on paying it down.

That being said, you should always also be saving and investing. You need to figure out what balance works for you. So is that 80/20 – 80 per cent paying down your mortgage and 20 per cent saving and investing – or vice versa? If you’re okay with your mortgage debt, probably the best use for your money now is twofold.

The first is putting cash away into an emergency fund in case you lose a job or your household is impacted for cash flow with the pandemic continuing. Having some cash on hand is never a bad idea. As we’ve learned, this pandemic is not just lasting three to six-months. This has been going on almost a year.

If you have some cash set aside, and you’re comfortable with your mortgage payments, investing money is going to be a much higher and better return and a great way to make your money work for you. Build a stock or investment portfolio with things like index funds and ETFs in it that are well diversified, well-balanced and low-risk. That can absolutely yield you seven to 10 plus per cent in returns every single year.

HR: I don’t believe that paying off your mortgage right now should be a focus. Interest rates are just too low. If this pandemic has taught me anything, it’s that people need to make sure their emergency savings are fully funded and also that they don’t have any insurance gaps.

A lot of people rely on their employers for their insurance: life insurance, disability insurance, critical illness insurance. If you lose your job, you lose the insurance. Really make sure that you have even just a portion of it secured privately. Speak to your financial adviser about that. I would be looking at private insurance to fund any gap so that if anything happens to your job, at least your family is protected, your debts could be paid off with that insurance.

If there is anything left over, save it for retirement. We have a real opportunity for maximizing tax-free savings accounts and maximizing RRSP accounts. Those are two great savings vehicles in Canada.

I would put your emergency fund in a TFSA because you can still use it. If you don’t need it, great. And you don’t pay any tax on any growth of your investments. That’s a great place to put your emergency fund.

What should be the goal for an emergency fund? Should it be three months of what you could live on, so to speak?

HR: Before COVID, I was recommending that if you have debt, do $1,000 first. Because $1,000 will cover most deductibles if you got in a car accident or something happened with your home; $1,000 would see you through a blown tire. And then take the extra dollars, throw it on your debt.

But now my advice is more. Let’s focus in on two to three months right now. Then we’ll handle your debt.

You should work towards three to six months of living expenses without having to cut anything. People think an emergency fund should just cover the basics; like the four walls. But human nature comes in like. You don’t want to tell your 10-year-old that they can’t go swimming anymore because daddy lost his job. That’s a hard conversation. Instead, try planning for this and putting the money away so that we don’t have to have that difficult conversation.


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