Just can’t leave this one alone…
The Globe and Mail ran a great article about the recent mortgage rate hikes by the Big Banks…..Seems like more of us are questioning the latest round of fixed rate increases….
The article gave some great stats that I wanted to share… First, we should point out that Fixed rates are affected by the Bond Market for the most part but Banks also raise money through GICs… Variable rates are affected by the Bank of Canada Key Lending Rate…. with that in mind…. here are the stats from the article….
10 YEAR AVERAGE…
- 5 yr Bond 4.05%
- Big Bank 5 yr posted fixed rate 6.75%
- Big Bank 5 yr GIC 3.31%
THIS WEEK’S NUMBERS…
- 5 yr Bond 3.02%
- Big Bank 5 yr posted fixed rate 6.25%
- Big Bank 5 yr GIC 2% to 2.1%
Has to make you wonder…?
Yes, it’s true….yesterday, RBC lead the way with another interest rate hike on their 5 year fixed mortgage… followed by TD and Laurentian Bank…. It was a 0.15% increase for a new 5 year Bank Posted rate of 6.25%. This marks the 3rd increase in a month.
This latest rate increase is leaving many puzzled as the Bond Market has remained somewhat flat… the 5 yr Bond yield is currently 3.07%. A fully discounted 5 year fixed rate at TD can be had for around 4.79%.. that’s giving a huge spread of 1.72%… well above the 1.20% to 1.30% that Banks normally seek….
Okay, so why would the Banks increase the fixed rates? Sometimes Banks price themselves out of the market when they achieve their market share… and sometimes it’s just profit taking…. But don’t settle for these rates if you are looking for a Fixed rate.. the Broker Market is still offering much lower rates and the Variable rate mortgage can be had for around 1.70%….
Sometimes it’s just easier to see the numbers on a graph.. Here are a few updated graphs from Firstline Trust… Firstline Trust Historical Rates February 2010… Notice the spread between the Bank Prime rate and Fixed Rates… the spread is usually around 1.00% to 2.00% in favour of Variable rates.
Variable rate mortgages have outperformed Fixed rates in over 88% of the time…. here’s a great study by Professor Moshe Milevsky of Schulich School of Business… Milvesky variable rate 2008. And here’s an article today by the Canadian Press that comments quietly, that Variable Rate should still be considered…
Hey, by the way… did I mention that we are still in historical rate territory? If you look back at historical rates, you will see that it’s still a GREAT time to borrow money… Fixed rates in the 4.00% range… Variable rates still under 2.00%… Doesn’t sound too bad to me…
TD and RBC have increased their 5 year posted mortgage rates this morning. We can expect others to follow. This comes as no surprise as the 5 year Bond Market increased to 2.87% causing the margins to shrink.
This is probably the beginning of several increases to come over the coming months. If the Economists are right, then we will see these types of hikes followed by a pause to see how the economy reacts.
We will be paying close attention to inflation, unemployment and the $Canadian dollar.
Fixing or locking in your rate may be an option for some but variable rate mortgages are still around 2.00% below 5 year Fixed Rates.
I’m still a fan of variable rate mortgages. I just think that they are a better product. But hey, that’s just me. We are all different and have different needs. Always talk to a Mortgage Broker to get your needs evaluated.
We’ve seen a lot of media coverage about the interest rate hikes coming this summer.. yes, it’s true… The Bank of Canada will raise their overnight rate very soon.. By how much? Maybe 0.75% by the end of the year.. or maybe 1.00% like this these Economists are forecasting as reported in the Globe and Mail.
Think about it.. if you arranged your variable rate mortgage before Oct 2008, then you have been enjoying interest rates below 2.00%… WOW!…I mean come on, are you kidding me? What’s wrong with that…?
So let’s assume rates go up by 1.00% or even 2.00% like some think it will over the next few years… that would still mean your mortgage is below 4.00%…. And the record low for a 5 year fixed mortgage rate is just below 4.00%…
That’s right… even if rates increase by 2.00%, you would still be in historical low rates when compared to a 5 yr fixed rate…..So why is this so bad or going to be such shocker??
And by the way, competition and improved investor confidence is bringing variable rate mortgage pricing closer to normal levels…..the good old days…!
To qualify for a variable rate mortgage you had to qualify at the 3 year fixed rate…posted rate for most lenders…
I hope you are seeing a pattern here…. the New Mortgage Rules coming into effect April 19 will mean you must qualify at the Chartered Bank 5 yr POSTED rate….Banks would love for all their clients to take a 5 yr fixed rate as these are the most profitable product for them…(would you rather pay 1.85% or 3.79%??)
Don’t be in too much of a hurry to get yourself into a higher rate…a fixed rate… you are only buying insurance… and very costly at that…..
For some of us, a fixed rate is worth the peace of mind and is important for us to know what our budget is … Discuss with a mortgage broker…. get the facts…