RateSupermarket.ca’s Expert Mortgage Panel Believes Fixed and Variable Mortgage Rates Will Remain Level in February

TORONTO, Feb 7, 2012… Recent fluctuations in variable and fixed mortgage rates have left Canadian consumers confused about future mortgage trends.  The good news is that February should be less volatile, with RateSupermarket.ca‘s Mortgage Rate Outlook Panel anticipating both fixed and variable mortgage rates will remain level during the month.

At the end of last year lenders reduced their discounts to prime which increased variable rate mortgages due to tightening margins. Last month they dropped fixed mortgage rates to record lows to kick off 2012 and develop their sales pipelines for the new year.  So what’s in store for this month?

Fixed mortgage rates: Unchanged

The big banks recently dropped their best mortgage rates for fixed 4 and 5 year terms to record lows, causing a frenzy in the market.  Hyper competition to lock down market share early in the year has started to cool with most of the rate specials ending. Although, spreads between bond yields and current fixed rates still remain attractive (technically lenders have room to drop fixed rates even more!).

However, lenders are likely to practice caution given the continued uncertainty in the global economy and the escalating political and media pressure about low rates fuelling a housing bubble.  As a result, our Panel members anticipate fixed mortgage rates will remain unchanged in the short term.

Variable mortgage rates: Unchanged

The next Bank of Canada rate announcement will take place on March 8, 2012.  Most experts believe they will hold interest rates steady again, leaving variable mortgage rates unchanged. Given the Federal Bank’s recent announcement that it will keep US interest rates low into 2014, coupled with very weak recent Canadian economic data, our Panel members think any alternative action from the Bank of Canada is unlikely.

To read all the detailed commentary from our Panel Members, please visit: http://www.ratesupermarket.ca/mortgage_rate_outlook_panel/

About the Mortgage Rate Outlook Panel

The Panel includes some of the country’s top mortgage experts, and helps Canadian consumers make informed decisions by offering a short-term outlook for fixed and variable mortgage rates.

This month’s panel members:

• Mark Kocaurek, Senior Vice President, Treasury & Lending (Chief Lending Officer) of ING DIRECT Canada
• Dr. Ian Lee, Director of MBA Program, Sprott School of Business, Carleton University
• Wayne Spinney, Mortgage Agent, Centum Mortgage Professionals
• Dan Eisner, MBA. AMP. President, Verico True North Mortgage
• Elisseos Iriotakis, President, Safebridge Financial Group

About RateSupermarket.ca (www.ratesupermarket.ca)

RateSupermarket.ca is the largest impartial rate comparison service for personal finance products in Canada. Founded in May of 2008, their easy to use comparison engine provides much needed transparency to the Canadian financial market and allows visitors to quickly find the best mortgage rates. Their new Mortgage Tool App for the iPhone also allows house hunters to compare mortgage rates using their Smartphone. Over 1.5M Canadians have turned to RateSupermarket.ca to save money on their mortgage, insurance, credit cards and GICs.

Experts will tell you your debt-to-income ratio is one of the best ways to gauge your financial position. The media often quotes the Bank of Canada saying Canadians are at dangerously high levels of debt at 153 per cent. But what does that mean? I’ve spent countless dinner parties arguing how to properly calculate debt to income ratios and how can you tell if your in the danger zone. There are many schools of thought on how to asses your financial health.  Here are a few.

Your ability to service your monthly debt

Start by calculating how much fixed costs (debt) you have every month. These are costs you would pay even if you were away on holiday all month. This includes, mortgage, car payments, insurance, utilities, property taxes, minimum credit card payments and minimum student loan payments. Then calculate how much money you bring in as a household in one month. Your salary, your spouse’s income and any money you make from investments.

Take the first number (your debts) and divide it by the second number (your income) and multiply it by 100.

Experts say, ideally you want this number to be less than 30 per cent. If you’re between 30-40 per cent be careful where you are spending your money and if you’re creeping close to 50 per cent. You may want to cut back on some of your fixed living expenses.

Your total debt compared to your income

This is the debt to income calculation Statistics Canada uses to come up with that scary 153 per cent figure. Take your total debts, home loan, car loan, line of credit and credit card debt. Calculate how much money you would need to say “I’m debt free!”

Take that number (total debt) and divide it by your total annual household earnings after taxes (total income) and multiply it by 100.

Experts will say, if that number is under 130 per cent you are in good shape. 130-140 per cent you are in a vulnerable position. More than 140 per cent is getting close to the danger zone and more than 150 per cent means you’re operating at a debt level that would be hard to handle if interest rates were to rise 2-3 per cent.

Sorry! One more ratio

Canadians also need to look at their debt to asset ratios. This means the ratio of how much money you have if you sold everything compared to your total debt or liabilities.

Calculate all the debt you have outstanding. How much is left on your mortgage, credit cards, pesky line of credit and heck even your library dues. Who do you owe money to right now? Jot it all down. Then, add up how much your assets are worth,  your house, car, stock portfolio any other investments, even your 60 inch T.V! Anything you own with a re-sale value. Imagine you’re moving to Argentina to start a new life and you had to sell it all.

Take how much you owe to everybody (total debt/liability) and divide it by how much your stuff is worth (total assets) and multiply by 100.

Again, experts say the higher the number the fewer assets you have to back up your debts and that’s not very good. For example if you total assets are $1,000,000, but you owe $900,000. You ratio is 90 per cent. You have little equity in your home and you’re the fakest millionaire around. But on the other hand if you owe $100,000 but your assets are worth $250,000 you are well backed by the equity or assets you already have in your home.

No need for online calculators

I’m not going to give you a link to any online calculators, because this is easy math that most of us can figure out and frankly most of the calculators make the situation more confusing. If you do the math yourself it will help you understand where you may be spending too much and what these numbers really mean.

The better ratio

In my opinion the better ratio is the one that calculates your ability to service your monthly debt. That is the number most banks use to understand your ability to pay your mortgage. 

But that does not mean you should take a $1,000,000 loan just because the bank says you can afford the minimum payments. Calculate your affordability based on at least 2-3 percentage points higher in interest. This is the best way to protect your financial health.  Even if you’re on a fixed rate mortgage it means when your mortgage renewal comes up and interest rates are higher, you’re already well positioned to make those higher payments.

But my ratios are so high! Don’t worry so are mine

• Rubina’s household ability to service monthly debt: 50 per cent
• Rubina’s total household debt compared to income: 190 per cent (OMG)
• Rubina’s household debt to asset ratio: 44 per cent (yikes)

But, my husband and I are in our 30s. We pay our loans at a rate 3 percentage points higher than what the bank wants us too. If we were to lower our payment to the minimum, our monthly ratio would be lower as well. Also, we have no “bad” loans like credit cards or expensive lines of credit. We own our car and are conscious about our variable spending, so our ratio of household debt compared to income is decreasing every month. Finally, we bought our house two years ago and this is the most debt we will ever be in, as time goes on our debt to asset ratio will improve.

On top of this we’re well prepared, in the last year we have built a 6 month rainy day fund and we both have substantial retirement portfolios and good job prospects.

You need to take all of this into account when you calculate your own affordability. The ratios are important, but always put them into perspective with your unique situation.  Never live beyond your means.

This past Tuesday the Bank of Canada had their first meeting of 2012 to discuss any changes they were going to make to the overnight lending rate.  Low and behold … no change.  This came as no big surprise to Canadians and the overnight rate remains steady at 1 percent.  FYI the next meeting is scheduled for March 8^th, 2012.

How does this impact the mortgage industry exactly?

Well, the overnight lending rate (the rate at which banks lend money to each other) has a direct influence on the prime lending rate (the rate at which banks lend money to consumers).  Think of the prime lending rate like the sun in the variable mortgage rate’s solar system since all variable rates revolve around prime.  Bottom line, no increase in prime means no increase in variable rate mortgages and no increase in monthly mortgage payments.

Release the HOUNDS!

Talk about some hot competition!  Last Friday, BMO announced a special 2.99 percent 5 year fixed rate.  RBC quickly responded by offering the same 2.99 percent but only for a 4 year term.  TD matched RBC’s 2.99 percent 4 year fixed and ING is now offering a 3.99 percent not on a 4, not a 5 but a 10 year fixed (wow)!  After mulling over and digesting what this might mean for their market share and presence in the competitive mortgage market over the weekend, Scotiabank announced their 2.89 percent 3 year fixed offer on Monday.

The Three Little P’s (no, not piggys)

Given the super low rates that hit the market over this past week, it’s even more important for consumers to know what other details they need to consider before signing on the dotted line.  Think about the 3 P’s: pre-payment privileges, portability and penalties.  These options could make or break that perfectly low mortgage rate.

1. Pre-Payment Options

According to a survey conducted by CAAMP, 17 percent of mortgage holders made lump sum payments in 2011 and those who did prepaid an average of 7.8 percent.  For this to be you next year you should ensure that your ability to make lump sum payments coincides with the option to do so.  Generally speaking, pre-payment privileges are around 15-20 percent of the original principal amount, but sometimes “no frill” mortgages will offer a lower pre-payment privilege at a lower rate.

So before you get enticed by that really low mortgage rate, check out the pre-payment options.  If the low mortgage rate limits your ability to pay down your mortgage faster, it may cost you more in interest in the long run. On the same note, make sure you are not paying a higher rate for a mortgage feature that you are not taking full advantage of.

2. Portability

Really love that low 10 year fixed rate but think there is a chance you could move in the next 10 years?  If the mortgage you have is portable, you’re in good shape!  Portability can save you money down the road if your rate (a.k.a. today’s historically low rate) is lower than the rates at the time you move in the future.  A portable mortgage allows you to transfer your mortgage to a new property (subject to a credit approval and sometimes a property appraisal), avoiding any penalties of breaking your mortgage.

Not to worry if the new mortgage you need is larger than the remaining balance on your existing mortgage, you can actually apply for a larger amount and your rate will be a weighted average between your old rate and the current rates offered.

3. Penalties

Your dream house just went up for sale and after years of working for the man, it is actually in your budget!  But you didn’t have this helpful blog to read when you first shopped for a mortgage and now you realize your mortgage doesn’t have a portability option.  Oops!  The good news is you can break your mortgage and get a whole new one for your dream home.  The bad news is it’s going to cost you a mortgage penalty, likely the greater of 3 months interest or the interest rate differential (IRD).

Before you commit to any mortgage product make sure you have an understanding about what it will cost you if you need to break the contract and get out early.

Today’s Mortgage Shopper

If you’re currently in the market for a mortgage, consult with a mortgage professional before making a decision and don’t be ashamed to ask a lot of questions.  You shouldn’t only consider the lowest possible rate when searching, look at the product details as well.  Also, it’s not just about finding a mortgage that meets your needs today, but also in 1, 3 and 5 years time.  Yes the 5 year rates are great, but if you’re home is only a stepping stone and you can’t port the rate later you may want to consider a shorter term.  A custom mortgage for a custom home.

The Bank of Canada announced this morning that interest rates will remain unchanged for the 11th consecutive time over the past 15 months.  The last time the BOC made a change to the overnight lending rate was in September 2010 with a moderate increase of 0.25 per cent.

The overnight rate currently sits at 1 per cent. The Bank Rate is  1.25 per cent and the deposit rate is 0.75 per cent.

The news is really no news at all, given that nearly all industry professionals and top economists were anticipating no change. But what should be of interest to consumers is the justification behind the decision.  Here’s why the Bank of Canada is keeping interest rates where they are.

Europe

• The outlook for the global economy is getting worse.
• The recession in Europe is expected to be deeper and last longer than originally anticipated.
• The BOC was coy in suggesting they had faith Europe could get a handle on the situation: “although this assumption is clearly subject to downside risks”.

The U.S.

• The U.S. grew more than expected at the end of 2011, although this is not likely to last.
• The U.S. recovery will be more modest going forward due to continued household deleveraging and negative effects from Europe.

At Home in Canada

• When it comes to the Canadian economy, little has changed.
• It is estimated that GDP grew by 2.4 per cent in 2011 and is expected to grow by 2.0 per cent in 2012 and 2.8 per cent in 2013.
• Similarly to the U.S., we experienced slightly better growth in the second half of 2011 than anticipated, which is expected to be more modest going forward.
• Little is expected from net exports in 2012, due to moderate foreign demand, increased competition and a strong Canadian dollar.

Inflation

• In 2012 inflation should remain level.
• Total and core inflation is expected to reach 2 per cent by the third quarter of 2013.
• The BOC recognizes that several significant upside and downside risks are prevalent in the inflation outlook for Canada, but they believe they have a handle on the risks and will be able to maintain their key mandate of keeping inflation under 2 per cent.
• With inflation in check there is little reason to believe that we will see a rate increase any time in the near future.

Consumer Debt Levels

One of the more worrying comments made by the Bank of Canada at today’s announcement was their forecast for consumer debt levels. With rates near all time lows more and more Canadians are taking advantage of the very favourable financing conditions.  This is expected to continue and grow.

“Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further.” says the BOC.

A Note of Caution to All Home Owners

Today’s announcement means that your bank’s Prime lending rate will not change, which in turn means that variable mortgage rates will not change.  If you are on a variable rate mortgage, take advantage of this low rate environment and pay down more of your mortgage principal now.  You will be glad you did when rates increase in the next few years.

In the red corner… currently weighing in just under the Canadian Prime lending rate at Prime – 0.25%… the 5 year variable rate. And in the blue corner… currently weighing in around 2.99% (new rate advertised January 13, 2012)… the 5 year fixed rate. LET’S GET READY TO RUMBLE!!!!

This will be a good fight over the next few months; but many Canadian’s are putting their money on fixed mortgage rates.

This Week – The Fixed vs Variable Debate Heats Up

Variable rate mortgages have typically been a better choice for Canadians over the last 25 years. However, with the spread between the two rates currently around 0.24%, consumers are finding it harder and harder to gamble and are turning to lenders and brokers for a fixed rate.

This trend is especially pronounced today after TD changed their special 4 year fixed rate to 2.99% in order to compete with BMO’s 5 year fixed rate, also at 2.99%. But just like any good deal, these rates won’t last forever! TD’s rate is valid until February 29th and BMO’s will only last until January 25^th.

Who will Come Out on Top?

Here’s a comparison of fixed vs variable mortgage rates over the last 25 years from FirstLine Mortgages:

Note: when you visit your bank they will typically discount the posted rate, (or at least they should) so the green line shown should be a little lower across the board

Over the last 25 years, the Bank of Canada has:

• Made changes to the prime lending rate an average of 6 times each year
• Each change to the rate has been by either 0.25% or 0.50%
• Year over year the prime lending rate has fluctuated by 1.23%

So, what you really need to ask yourself in the next few weeks if you are currently looking for a mortgage is … “Do I think that over the next 5 years, the prime lending rate is going to increase by more than 0.24%?” If the past is any indication of the future, it is more likely than not that it will. What does that mean? You would be better off going with a fixed mortgage rate!

Econ 101: Since the downturn of the market in 08/09, the Canadian economy has been moving in the right direction; however the global economy has really been holding us back from our full potential. If Canada was an island economy (meaning it was unaffected by global economies), We would likely see a rise in interest rates.  Unfortunately if we increase rates too soon our exports become more expensive relative to other competitors in the global market and that would be bad news for Canada.

Final Thoughts for the Week

Weigh out your options and play around on a mortgage calculator to see what your mortgage payment would look like if the prime rate would increase vs. what they would be at current fixed rates, you may be surprised! Ask your broker what your options are if rates do increase and you have a variable mortgage, can you lock in? And finally, stop searching for Prime – 0.90%… it doesn’t exist!!

RateSupermarket.ca’s Expert Panel Believes Fixed Mortgage Rates Will Decrease as Competition Heats Up.

TORONTO, Jan 9, 2012… Canadian consumers could see lower fixed mortgage rates this month as competition heats up and lenders look to build their mortgage pipeline for the year, says RateSupermarket.ca’s Mortgage Rate Outlook Panel for January 2012.

Lenders are eager to get a good start to the new year and build up their fixed mortgage rate client base, which means fixed rates could decrease as competition picks up. Variable mortgage rates, on the other hand, are expected to remain level.

Fixed mortgage rates: Down

Given the forecast for slow growth in 2012 and the ongoing European sovereign debt crisis, Canadian bond yields are expected to stay where they are; which is a strong indication that fixed mortgage rates should remain unchanged in the short term.

However, our panel of mortgage experts is not ruling out a slight reduction in fixed mortgage rates as lenders get a jump start on the year and build their pipeline for 2012.

Variable mortgage rates: Unchanged

The next Bank of Canada interest rate announcement will take place on January 17th, 2012.   Our panel of mortgage experts is not expecting any change in the key overnight lending rate for at least the next 6 months due to ongoing turmoil in the global economy.  It is also unlikely that lenders will increase or decrease their discounts to prime rates in the short term.  As a result, Canadian consumers can expect variable mortgage rates to remain where they are.

To read all the detailed commentary from our Panel Members, please visit:

http://www.ratesupermarket.ca/mortgage_rate_outlook_panel/

About the Mortgage Rate Outlook Panel

The Panel includes some of the country’s top mortgage experts, and helps Canadian consumers make informed decisions by offering a short-term outlook for fixed and variable mortgage rates.

This month’s panel members:

• Mark Kocaurek, Senior Vice President, Treasury & Lending (Chief Lending Officer) of ING DIRECT Canada
• Dr. Ian Lee, Director of MBA Program, Sprott School of Business, Carleton University
• Dan Eisner, MBA. AMP. President,  Verico True North Mortgage
• Elisseos Iriotakis, President, Safebridge Financial Group
• Wayne Spinney, Mortgage Agent, Centum Mortgage Professionals

About RateSupermarket.ca (www.ratesupermarket.ca)

RateSupermarket.ca is the largest impartial rate comparison service for personal finance products in Canada.  Founded in May of 2008, their easy to use comparison engine provides much needed transparency to the Canadian financial market and allows visitors to quickly find the best mortgage rates.  Their new Mortgage Tool App for the iPhone also allows house hunters to compare mortgage rates using their Smartphone. Over 1.5M Canadians have turned to RateSupermarket.ca to save money on their mortgage, insurance, credit cards and GICs.

First things first, I hope everyone had a fantastic Holiday with family and friends.  I know I did!

This week, as 2011 comes to a close, I wanted to pull together my thoughts and observations from the year – and what a year it has been!  Let’s start with mortgage rates.

If you’ve been carrying a variable rate mortgage, 2011 has been a great year for you.  The Bank of Canada held their target for the overnight rate at 1% all year long and subsequently none of the major banks changed their prime rates, currently steady at 3%. This resulted in no change to monthly payments for variable mortgage holders, and those of you on Prime – 1% are very lucky!

Fixed mortgage rates also decreased in 2011, with the benchmark 5 year fixed mortgage rate hitting an all-time low of 2.99% in November, as mortgage lenders became more competitive and the bond markets responded to the global financial crisis.  As a result, the spread between the 5 year fixed rate and variable rate dropped to a mere 0.45%. This is giving Canadians shopping for a mortgage a lot to think about as they lay out their five-year financial plans.

The European debt crisis and the dire global economic outlook is bearish and that is putting downward pressure on longer-term bond yields. It means its likely fixed mortgage rates will remain low or even drop further in early 2012.

The Fixed Versus Variable Debate

History shows that 90% of the time going with a variable mortgage rate will save you money. But with fixed and variable rates so close together during the second half of 2011 this may be the one of those times when a fixed mortgage rate is a better deal.

Another phenomenon we saw in 2011 is that less and less banks are offering prime minus on their variable rate products, sending the signal they are not willing to offer money at such a deep discount if rates are going to remain low. They’re simply not making the profits on mortgages as they have in the past.

The Canadian Economy Sits and Waits

Canada’s economy is doing better than the U.S. and certainly is much healthier than any European nation, but the Central Bank can’t move and raise rates to “normal levels” unless there’s more confidence that the global economy is recovering.

In 2011, Greece asked for two more bailouts. The leaders of Italy and Greece stepped down and currently the future of the Euro hangs in the balance. This year made it clear that the European debt crisis is far from over.

This is why we are seeing a standstill in Canada’s overnight lending rate. Economists say we can expect these lower than normal rates to stick around until at least mid 2012 at which time the Bank of Canada Governor Mark Carney will need to decide if the country is ready for a rate hike.

Carney finds himself walking a tightrope as he tries to balance what’s best for the country compared to what is happening around the world.  If Canada was an island-economy that remained uninfluenced by outside problems, by now, interest rates would be higher. But we depend heavily on our foreign partners for trade and our interest rates will lie dormant until the world economy starts to wake up.

Mortgage Rates in 2012

If you’re looking for a mortgage right now you should take a good hard look at fixed rates. 3 year (2.89%) and 4 year fixed mortgage rates (2.99%) are currently available below Prime, and 20 – 30bps lower than the popular 5 year fixed rate, you could be locking in real savings over the next few years. If the Bank of Canada raises rates in the next couple of years, your fixed rate will look like a bargain.

If you’re considering a variable rate make sure you calculate your affordability taking into account possible rate hikes (assuming the economy recovers slowly and gradually) over the next 2-3 years.  A good assumption is that rates will be 2 – 3  percentage points higher then where prime is right now. Even better, base your current monthly mortgage payments on this higher interest rate to protect your budget from being affected if rates start to rise faster than what you expected.

Remember, 2011 was not a normal year. Rates should not remain this low for the whole of 2012.  Expect slow, incremental increases in the second half of next year.

This was a tough year for me.

I was laid off abruptly in April 2011 from a job that I thought was solid and found myself in a situation I had never been in before. I was worried I hadn’t saved for a rainy day and all I had was my RRSP that I was unable to dip into without paying a huge penalty.

After a few months of soul searching (which I recommend to anyone that has been laid off), I decided the right thing to do was to get back to what I was best at, financial journalism. I also realized that once I started making money I would have to put more away to plan for the next rainy day that came into my life.

Like a religious promise, I’ve been putting 10% of my after tax income away into a long-term savings account, this is not my retirement saving or my holiday fund. This is money that I will be able to rely on if my financial situation goes south again. I realized this year that although I have set myself up very well for later in life, I own investment properties that will be paid off when I turn 55 and I have a sizable amount in my RRSP, but I have nothing for the emergency situations that can happen at any time.

My New Year’s promise is to increase the amount of after tax income I put away from 10% to 15%.

The World Has Changed a lot in 2011

If I learned anything from this year, it’s that anything is possible.  Just look at how the world has changed in the last 365 days.

The debt problems in Europe are worse.  Whereas last year we thought it was a few countries dealing with their debt crisis now the future of the Euro is in peril.

The Occupy Movements proved a large proportion of people around the globe are frustrated with the economy and their own financial situations.

The Bank of Canada did not budge the interest rate all year, scared out of its mind that it would bring Canada’s economy to a standstill. Subsequently our household debt continues to rise and hit new record levels.

But the most surprising is that for the first time in history the debt rating of what everyone thought was the world’s most powerful economy the United States of America, was downgraded and remains lower even today.

My Promise for 2012

Here is my take away for 2011 and what I want to do different in 2012. Nothing is forever, always plan for when times may not be as good as they are right now. Save more money and if you’re in debt pay it off before you do anything else.  Don’t live your life a slave to your debt payments. Also take a good holistic look at what you spend your money on annually. Add up how much you spent on clothes, going out for dinner and vacations this year and see if that number makes you nervous.

If you’re spending more than 40% of your after tax income to service your debt you need to take a hard look at how to get those numbers lower. For example if you make $3000 a month but your minimum variable rate mortgage payment is $1,200 a month  you’re over extending yourself and are vulnerable to financial problems when interest rates start to rise.

Ask yourself if you could live with one less car, or are you wasting money by throwing away food that goes bad in the fridge or do you really need to go the spa every second week?

I don’t believe saving money means cutting out all the joy in your life, but it means putting the way we spend money into perspective.

I’m an optimist and I believe we all have the ability to make a change to save more and pay off more debt. Make 2012 the year you get yourself on the track to financial freedom and by this time next year you will see how it’s paying off.

Happy New Year!

Variable mortgage holders can rest easy knowing that their mortgage payments are not expected to increase any time soon.  Once again the Bank of Canada announced that they will leave the target overnight lending rate constant at 1%.

This means that Prime rates will also stay the same and therefore variable mortgage rates.

The Bank of Canada stated the following reasons for holding the course:

• The debt crisis in Europe is intensifying
• The recession in Europe is expected to be worse than originally thought
• This will dampen global growth and particularly expansion within the US.
• The US housing market is showing no signs of recovery

On a positive note, the Bank of Canada announcement also referred to slightly better than expected growth in the US due to consumer spending and business investment.  Growth in China and other emerging-market economies continues to be strong.

Here in Canada, things are surprisingly good.  Economic growth in the second half of the year is expected to be slightly higher than forecasted.  But we are not immune to the activity going on across the ocean and only time will tell just how much of an affect the crisis in Europe will have on Canadians.

The Bank of Canada meets again on 17 January 2012 for the next interest rate announcement.

For a while now we’ve been reading headlines about how interest rates are at “historic lows.” Which is great news for anyone with a variable-rate mortgage, line of credit debt, or who is looking to negotiate for things like car loans or fixed-rate mortgages.

But what’s the other extreme? How high have – and could – interest rates go, and what would it mean to your savings if they did?

Here’s a quick walk through the history of interest rates in Canada and abroad.

Interest Rates – High Times

If you’re not old enough to remember the recession of the early 1980s, your parents certainly will. In 1981, mortgage rates peaked at more than 20 percent. (That’s not a typo.)

Many people whose mortgages were up for renewal during that period found themselves signing up for mortgage rates that were twice as high as they were just five years prior. Some resorted to paying hefty upfront fees to get private lenders to offer them rates in the mid-teens.

The rates stayed in the double digits until the mid-1990s, when they began their gradual, more or less downward decent to today’s posted rates. (You can take a look at the history of how Bank of Canada’s trend-setting Bank Rate has risen and fallen here.)

Sounds bad, doesn’t it. Well it was. Here’s how those numbers add up in terms of monthly payments. Let’s say you have $200,000 outstanding on your mortgage, and you’ve opted for a five-fixed rate, payable once a month. Look how significantly your payments increase as the interest rate escalates.

• Based on a 5.29 percent mortgage (which is the 5 year fixed posted rate for most of the big banks) you’re looking at $1,196.45/month.
• Double that to 10.5 percent and you’ll pay $1,856.66/month.
• Double-down again to an interest rate of 21 percent, the high back in 1981, and your monthly payment jumps to $3,378.97.

Although it’s unlikely that rates will hit the likes of 15-20 percent again, we may very well see 5-7 percent in the long run.  That type of a jump may still be 2-3 times higher than your current mortgage rate.  Do you think you could afford paying nearly three times as much as you do today for your mortgage, and still afford those other essentials like heat and groceries?

What to do Today?

First off, don’t stretch yourself too thin. If you are house shopping, don’t forgot that mortgages are long-term commitments and lots of things can change over the duration.

While we can all hope and pray mortgage rates don’t climb into double-digits again, it’s a safe bet they will rise at least a few percentage points above where they are right now. So factor that in when calculating all your carrying costs so you don’t find yourself facing an eviction notice soon after your policy comes up for renewal.

Many mortgage professionals are now advising that people signing up or renewing mortgages today should opt for the fixed rate products. The logic being that since the Bank of Canada’s prime rate (that the other banks base their mortgage rates on) is pretty much guaranteed to rise, it may push variable rates much higher than the best fixed rates currently available.

Ultimately, that’s a call for you to make based on your guess on how high the rates could climb and your comfort level with risk. Truly risk-averse borrowers may even want to lock in to a 10-year term (there are some currently posted 10-year rates below 5 percent) and buy themselves a decade of stability.

Regardless of the type of product you choose, here are two ways to minimize your risk, and the total cost of borrowing over the life of the mortgage.

1. Make bi-weekly instead of monthly payments. Instead of paying $1,196.45 once a month as in the scenario above, change your payment schedule to a bi-weekly payment of $552.21 and save yourself thousands of dollars in interest over the life of the mortgage. (The bi-weekly payment is slightly less than half of a monthly payment, but you end up making an extra payment each year – 26 bi-weekly payments version 12 month ones – so you’re paying down the principal sooner.)
2. Make lump-sum overpayments. Most (though not all) mortgages allow you to overpay up to 20 percent of the original mortgage amount every year. This money is applied directly to the principal (unlike your monthly payments which are divided between paying interest and principal). So taking your bonus or some other unexpected windfall and applying it to your mortgage can lead to significant long-term savings and help you pay off the mortgage earlier.

Interest Rates – Around the World

Think moving out of country would help? Not likely. While you may find cheaper digs in some of the more rural parts of the U.S. or U.K. – both of which offer interest rates comparable to our own, urban centres like New York, San Francisco, and London have some of the highest real estate prices and cost of living in the world.

Head down under to Australia and you’re looking at posted rates around 7 to 8 percent, which seems downright cheap compared to the 11 to 13 percent going rates in South Africa.

And while Hong Kong’s 2 to 3 percent mortgage rates might seem enticing, you have to remember that you’d be buying in a city where real estate can cost up to $10,000 a square foot. (Again, not a typo.)