Jul 27, 2010, Mortage rates still affordable
The Bank of Canada raised its key overnight lending rate by 0.25% last week, no doubt setting off another round of confusion about mortgage rates and regulations.
Most people will think interest rates will rise rapidly, which is not always the case, says Peter Kinch, founder of the Peter Kinch Mortgage Team.
“The last time rates moved, we actually saw the long-term rates fall,” says Kinch. “Long-term rates are governed by the bond market, which often assumes, or ’pricesin,’ a rate increase before it happens.
Last time, they assumed a higher than announced rate increase, which caused long-term rates to fall the following day.”
The Bank’s move, which takes its rate to 0.75% and the prime lending rate to 2.75%, had an immediate effect on the variable rate, rising to 2.15% (prime minus 0.6%) but it doesn’t necessarily mean buyers should rush to lock-in their mortgage, says Kim Gibbons, a mortgage broker with Mortgage Intelligence.
“While mortgage holders may be tempted to lock into a fixed-rate mortgage, a closer look reveals that a variable-rate mortgage could save them a lot more money, even if the Bank continues to raise rates,” says Gibbons.
Going with the current variable rate as opposed to a five-year fixed rate can save more than $15,000 in interest payments in those five years, says Mark Herman, a Calgary-based broker with Mortgage Alliance.
“Doing the numbers for a $250,000 mortgage, using the variable rate of 2.15% and 25-year amortization, the monthly payments are $1,076,” says Herman.
“Using a five-year fixed rate of 4.19%, the monthly payments are $1,340, a difference of $264 a month. Over 60 months, a variable will save you $15,840 in interest payments.”
Gibbons, using a five-year fixed rate of 4.29%, says if the Bank of Canada hiked its prime rate by a full percentage point over the next year, borrowers with a $250,000 mortgage with a 25-year amortization would save $17,478 over five years by going with a variable rate, compared to a five-year fixed rate.
“This assumes a scenario in which the Bank of Canada raises its prime rate four times by 0.25 per cent every three months,” says Gibbons. “When I run the numbers with clients, they’re often surprised by what mortgage strategy will save them the most.”
Herman expects fixed rates to continue to go down, but not for long.
“We know rates are eventually going to go up, but I think there will be a short period of time when fixed rates are going to be going down and the variable going up,” he says. “The Bank of Canada will probably (raise its rate) again in September and I expect prime to go to 3% and stay there until the end of the year or longer.”
Developing a mortgage strategy, rather than just diving in, is essential to saving money, says Herman.
“If fixed rates continue to come down and I think they will go below 4% to 3.9%, I would recommend taking a variable at prime minus 0.6 and then have the option of locking into a fixed rate later on as the rates continue to come down,” he says. “In the meantime you’re saving $264 per month on that $250,000 mortgage.”
Myke Thomas, Sunmedia