Earlhaig.ca
Calgary mortgage broker Trish Hart spends a lot of time these days explaining mortgage rate options to her clients. Gone are the days when "all a buyer wanted to know was, 'What's the lowest rate for a mortgage?' Today, borrowers are much more aware of the effect on the individual from what's happening at the macro level," she says.
That macro level came down to earth over the past year as Canadians saw people losing homes south of the border in the recent economic collapse. Suddenly, what was happening in Wall Street executive suites hit close to home in the form of foreclosures and tighter credit.
At the same time, interest rates are at historic lows for fixed- and variable-rate mortgages. Where does that leave you in deciding how to get the best deal when renewing your mortgage? Read on to find out.
Dramatic change in rates
Whether to lock in for a term of three to five years, or take on greater uncertainty with fluctuating rates -- that is the question. Two years ago, interest rates for fixed- and variable-rate mortgages were so close that borrowers didn't see much gain with floating rates against the security of locked-in rates.
That picture has changed considerably today.
Variable-rate mortgages are tied to the Bank of Canada's prime lending rate. That rate has fallen over the past two years as the government tries to stimulate the economy while holding the line on inflation.
However, because the prime rate itself has dropped so much, four percent within the past two years, the actual rate charged on variables has dropped from 5.2 percent two years ago to today's average of approximately 2.5 percent.
The five-year fixed-rate, which is tied to the bond market, was 5.75 percent two years ago, dropping somewhat to just over 5.5 percent at the end of last year. With more stability in the market, today's rate has fallen to an average of 4.29 percent.
Adding to the current attraction of low variable rates is the Bank of Canada's assurance that "conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010."
Canadians hesitate to take variables
With low rates and some guarantee they're slated to continue for the foreseeable future, it's hard to understand why the majority of Canadians opt for the higher-rate, fixed-term loans.
Rob Hafer, regional manager of mortgage brokerage Invis in Victoria, says uptake of variable-rate mortgages has doubled in the past two years. He estimates that today, it represents between 30 to 40 percent of borrowers, still a surprising minority of Canadians given the large rate differential.
"One of the reasons people take fixed-rate, even though currently the interest rate is much higher, is that they don't want to watch the markets all the time." It's what he refers to as the "sleep-at-night factor."
No guarantees
Even the Bank of Canada's commitment to hold the line on rates until mid-2010 is a conditional one, what Hafer calls a "quasi-commitment.”
"There's no guarantee. If inflation starts to rise, and depending on where the Canadian dollar goes, the central Bank may raise rates. The predicting part is the tough part," he says.
CIBC Chief Economist Avery Shenfeld stated in a recent CIBC World Markets report that "Canada's inflation rate will be no threat to the Bank (of Canada) easily fulfilling its pledge to keep interest rates at a slim quarter point through mid-2010."
Mortgage advisers say the current variable-rate mortgages that offer a lock-in provision are a good deal. But taking one does involve a certain amount of market-watching to know when it's time to opt for the security of stable rates over the next few years.
It also means you need to look at your own risk tolerance, says Hafer. "You do need to realize that variable rates can be volatile. You need to look at your ability to make payments if the rates go up, even by a fraction of a percentage point. You need to assess whether you have a cushion."
And while most variable plans do allow you to lock in, Hafer says "you need to ask what rate will I get, will that rate will be discounted and (are there) any penalties for changing."
With fixed and variable rates at all-time lows, experts caution that there's nowhere to go but up. Hafer advises that locking in is "probably not a bad idea. There's little downside to a fixed-term at these rates since rates are more likely to go up than down."
Hart says there is a "lot of uncertainty as to where rates will go and a lot of hesitancy on the part of consumers because of job insecurity, which is a huge factor."
Movement of money
How money moves between the more secure bond markets and the less secure equity markets will also affect interest rates. "Still, it's too simplified a way to monitor rates," says Hart, because "money moves internationally and there are a number of variables. Professionals have had difficulty making market predictions, so how can the average consumer predict?"
As a mortgage broker, Hart says "a lot of people think I have the ability to negotiate rates. I don't. The banks provide their best top rates for the day, and it varies daily in terms of who is offering what rates. In addition, there are broker-exclusive lenders who can sometimes offer a point or so lower, but overall, lenders are quite competitive amongst themselves."
One of the best pieces of advice Hart gives clients is to "take advantage of historic low variable rates, but make sure you have the provision to pay down the principal and then do it."
That said, with fixed-rate mortgages at record-low rates, the security they afford will suit the more risk-averse borrowers and those with little ability to make even slightly higher payments.
"People can feel overwhelmed with the macro picture," says Hart, "so you have to bring it back to a micro level to decide what type of loan you are comfortable with."
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