Posts Tagged ‘fixed rate mortgages’

What has happened to the Variable Rate Mortgage?

October 21st, 2011 No comments

What has happened to the Variable Rate Mortgage?

It is dying a slow death!   A couple of weeks ago I was able to get a client prime less 0.85%, today that is not the case!  Tonight one of the last lenders is moving up to prime less 0.15%, which is considered a good variable rate when most of the lenders are at prime.  The reason for this change, we are told, is due to the economy which has shrunk profit margins.

The fixed rate option is looking more and more attractive as opposed to taking a new variable rate mortgage.  The 5 year rate is at an historic low….3.39 for 5 year fixed or the very attractive 4 year fixed rate of 2.99%.  The difference in payment for a variable rate and a 5 year fixed rate is $27.87 per month, based on $100,000 amortized over 25 years or $7.15 for the 4 year rate.

I think the money would be well spent having the rate guarantee for the next 4 to 5 years!

However if you are in one of those converted variable rate mortgage of prime minus 0.50% or more, what should you do?
This is the word on the street!

• The Bank of Canada has indicated that it is not looking at raising the overnight rate anytime soon or at least will hold off until such time as it sees the economy improving.

• The U.S. has no plans to increase rates for the next two years making it more difficult for Canada to raise rates unless the Canadian economy is growing in spite of the sluggish U.S. economy.

• Canada is becoming attractive for investors’ thus larger demand for Canadian bonds.  This demand is keeping the bond yields down thus lower fixed rates on mortgages.

This week is Financial Planning Week, another passion that I have is teaching people about budgeting, I hope you find the article interesting!


Trying to Make Sense of Rate Increases!

June 8th, 2009 No comments

Many lenders have raised their interest rates on 5 year and longer fixed rate mortgages.

Why is this happening?

Banks lend more money than they take in through deposits.  In order to meet the demand for customer loans, they borrow money in financial markets. To ensure they are not taking interest rate risk, they lock in the rate on the money they borrow to match the term of the mortgage. For example, a 5 year fixed mortgage is funded by a 5 year fixed rate bond. In May, the rate on longer term bonds started to rise, meaning the banks cost of funds – the cost to the bank of raising the money needed to loan to customers — went up. When they pay a higher rate to borrow in the bond market this reduces their profit margins. This is why rates on the longer term fixed rate mortgages have increased. The relationship between bonds and mortgage rates is not new. Attached is a chart that shows how bonds track closely with mortgage rates. They tend to go up and down together.The good news is that the upward trend in bonds prices is a positive sign that consumer and investor confidence is on the mend.

What does this mean for you? 

For those of you who are in a variable rate and want to switch to a fixed rate, the general rule is as follows: The variable rate mortgage is usually a 5 year term, if you want to switch into a fixed rate in year two of your mortgage term you may switch into a 3 year term (the remaining term of your mortgage) 

Million Dollar Question, should I switch into a fixed rate now? 

This week in the Bank of Canada’s announcement they maintained their overnight target rate at ¼ per cent (prime remains the same at 2.25%) and they reiterated their conditional commitment to hold the current rate until middle of next year – on condition that inflation did not rise above their inflation target. What we are hearing is that the prime overdraft rate should stay the same until next year, what we are seeing is that the longer term fixed interest rates are increasing.  You should be asking yourself; at what point if any do you want to lock into a fixed rate.  Fixed rates are at all time low, we are told this is the bottom – do you want to lock in now loose your good rate or hold on for awhile – at what point will you be ready to switch if at all? 

Tough decision!