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CategoryMortgage Rates

Posted Case study

The Big Six have all raised their rates now…

A look at locking into a Fixed rate

By now, you’ve heard that Fixed Mortgage rates have gone up by 0.55% since November…5 year fixed is currently sitting at around 4.04% vs 3.49%.  (these are best broker rates…the best retail bank rates are 4.39%)…. Let’s take a closer look at what this will cost you.

On a $200,000 mortgage with a 25 year amortization, your monthly payment goes up by $58.89 or about $3,500 over a 5 year period.    That’s quite a bit of money…. and this probably gets a lot of us thinking about locking into a 5 year fixed rate….But is this the right strategy for everyone?

For some of us, it will make sense to take a 5 year fixed rate… this is not a bad option for those on a tight budget, pension income, or just can’t sleep at night thinking about rates…  make sure you are locking in for the right reason…

A look at NOT locking into a Fixed rate

Current Variable is 2.25%….  A $200,000 mortgage with a 25 year amortization has lower monthly payments by $185.16.  Okay, I know what you’re thinking and you’re right… this rate will not remain the same for 5 years.. In fact, we know it’s probably going to go up.   So it’s difficult to calculate exactly how much you would save or lose by sticking with a Variable rate…  History shows us Bank Prime goes up and down around 2 to 3 times a year….Look at this chart of Historical Rates. The RBC is forecasting for Bank Prime to go up by 1.00% this year and another 1.50% next year!!  (not sure I agree with this forecast).     If you like flexibility, are willing to tolerate rate movements, and want to take a calculated risk of floating your rate, then Variable could be a great option for you.

Is Variable rate more stable than Fixed rate?

The media keeps telling us mortgage rates are going up.. they will skyrocket….So why are people still considering Variable Rate mortgages?   We looked a little deeper and found some interesting trends…

-From Oct 2008 (the month of the U.S. Mortgage crisis) to Oct 2009, the Bank of Canada only changed Bank Prime 4 times…This was the worst recession since the Great Depression of 30’s….and yet Bank Prime only changed a handful of times….

-the BOC raised rates in 1992 because they thought the economy was strong enough to handle… they quickly lowered them but it was a little late as the economy staggered for another few years… this pattern has repeated itself on more than one occasion…most recently, 2010…

-the BOC forecasted that interest rates would skyrocket in mid to late 2010… they were wrong…

-Variable rate has historically been 1% to 3% lower than fixed rates.

Conclusion….Variable rate moves less often than Fixed rates… And yes, it’s more stable if you measure stability by rate movements… But there will be movement.. and maybe that’s what makes Variable rate a choice for only 25% of Canadians…  Us Canadians are a conservative bunch, or so our rep goes….  And by the way… The Banks would LOVE to have everyone take a 5 year fixed rate.. these are the most profitable mortgage products for them…. Keep that in mind…

Posted 1 Comment on Higher Bond yields are bringing higher fixed rates..but that’s not all. Mortgage Rates

Higher Bond yields are bringing higher fixed rates..but that’s not all.

Some of Canada’s major banks have raised their 5 year fixed mortgage rates… but not their posted rates.   It’s become common practice for the Big Six Retail banks to show a posted 5 year fixed rate ….but in the past few years the Banks have also started to advertise their so-called ‘special’ rate.

The ‘special’ rate has increased by 0.25% to 4.19% to 4.29%, depending on which Bank you visit.  Of course, these rates are still much higher than the true discounted rates available through Mortgage Brokers.   Wholesale 5 year fixed rates are still around 3.69% to 3.79% (these will probably go up in a few days by 0.25%).  But this is nothing new.

What’s different this time is that the Posted Rates didn’t go up.  We’re not sure why, but here is one definite result of this move…your mortgage prepayment penalty will not decrease, which is the usual effect of an interest rate hike.   That’s right, if you have a closed fixed rate mortgage to payout, your penalty is either 3 months interest or Interest Rate Differential (IRD).

IRD is calculated many different ways now and we are hoping the Federal Govt’s announcement of a standardized prepayment penalty will come soon (we hear it could come this spring).   Currently, Banks use formulas that include the Posted rate to calculate your penalty.  This calculation has become a lucrative source of revenue for the Banks.  Reports of 6, 10 and even 14 months worth of interest have been charged to unsuspecting borrowers.  Record low rates means record HIGH penalties.  Come on Federal Govt, we need this change now.

As an aside, Variable rates are still around 2.25%…. this larger gap between fixed and variable is going to make Variable more attractive.

Posted Interest rates

Inflation rises to highest level in 2 years…but don’t panic

Latest figures show inflation jumped 2.4% in October according to Statistics Canada… compared with 1.9% in September.    The Bank of Canada aims for an inflation rate of between 1% and 3%.    Anything over 2% can trigger the Bank of Canada to take action… Usually, a hike in the Bank of Canada Rate, which affects Variable Rate Mortgages..

However, it’s no reason to panic.  A one month inflation spike probably isn’t enough for the Bank of Canada (BOC) to take drastic action.  It’s probably gonna take consecutive months of higher inflation or other events before the BOC raise rates again.  Most experts believe the Bank of Canada will not make any changes til next year.

Throw in some Global issues like Ireland’s’ debt and the Korean conflict heating up and you get uncertainty… Uncertainty means rates should stay low for some time…

Posted Interest rates

180 day rate hold at 3.73%… CMHC 2011 housing forecast

As reported earlier today, TD was the first to raise fixed rates… they are up by 0.25%.. The TD Canada Trust Broker rate is 3.94% and can be held for 120 days…  TD has been out of the game with their 5 year fixed rate for some time… Most Lenders are offering 3.49%….. But this will most definitely go up as the Bond yields are over 2.30%…click here for the chart.

There is another option that is less talked about.   A major Bank is offering a 180 day rate hold on a 5 year fixed rate for 3.73%… this may not be for everyone, but it’s an option for anyone looking to buy but hasn’t found a house… or for those with a long closing…

Interesting, CMHC released their 4th quarter forecast and were calling for moderate activity in 2011… but they also said low mortgage rates will help to drive the housing market….This latest increase shouldn’t cause panic…these are still record low interest rates…  But we’ll have to follow the trend and see if CMHC makes any adjustment in their forecast…