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.

January is turning into one of the hottest months ever for real estate sales. Realtors say they have never experienced such a busy January.

What’s Behind the Boom?

Its being fueled by BMO’s move earlier this month to lower its five year fixed rate to 2.99 per cent. That’s the lowest posted rate from a major bank in Canadian history. The other banks have followed offering their own version of fixed rates below prime.  This historic event is pushing home buyers back into the market.

Royal LePage, which franchises brokerages across the country, recently forecast the Canadian real estate market will rise 2.8 per cent in 2012. That is slower compared to 2011, when the market rose 4.8 per cent.  But that forecast did not know banks were going to move fixed rates as low as they have.

Real Estate Poised to Heat Up

In my opinion, 2012 could be one of the hottest years for real estate.  The mini boom the country is experiencing now will only grow as we move into the busiest real estate season. March is traditionally the month when inventory of homes for sale increases and more buyers are out looking for a place to buy that will close during the summer months.

Canada’s Excellent Track Record is Paying Off

Why are mortgage rates so low in Canada? Our country’s reputation is driving international demand for bonds from Canada’s biggest banks. Foreign investors are fleeing to safety in Canada.  In the case of BMO, it was able to sell $1.5 billion worth of five-year bonds at a rate of 2.544 per cent, this month.  Making it easy for them to offer consumers the historically low-posted fixed rate. The lower the yield the better the signal that investors have confidence in a lender’s ability to live up to the terms of the loan.

These bond sales are moving through the system and pushing mortgage rates to record lows. It means homeowners can benefit from even cheaper money as more foreign investment moves into Canadian bank bonds.  With the Europe debt problems still spiraling out of control and the U.S.economy still on shaky ground the push for Canadian bonds could continue for the long run.

A Warning About Cheap Money

But as it’s been for three years, lower rates threaten to move Canadians into dangerously high debt levels. Many may be unable to afford their homes down the road. Anyone out shopping for a home should continue to calculate their own affordability at least 2 percentage points higher than what they are being offered.

The BMO special rate offer has now ended but fixed rates still remain unbelievably low at close to 3 per cent. Variable mortgage rates continue to be offered below prime and that means anyone searching for a new mortgage can explore this option. Low rates won’t last forever, but they seem to be here to stay for 2012. And the Canadian market stands to gain from it in a big way.

Since fixed mortgage rates have been dropping like flies lately, many Canadians are beginning to wonder if they should abandon their current mortgage and refinance at a lower rate.  “How do I do this?  Is it worth it?   What is it going to cost me?  WHERE DO I BEGIN!?” … sounds stressful doesn’t it?  Let me help!

The Break-Up

First and foremost, you need to figure out what all of this is going to cost you.  It doesn’t take a genius to know that paying $10,000 in penalties to save only $5,500 in interest with a lower rate isn’t exactly worth it.  So, what is the penalty going to be to get out of your mortgage?  GENERALLY SPEAKING (check with your lender), it is the greater of 3 months interest or the Interest Rate Differential (IRD).  3 months interest is pretty self explanatory, but the IRD involves a little math.

An Example

Let’s say that you have a mortgage balance of $200,000, your mortgage rate is 5.29% (originally a 5 year fixed rate) but you’re not up for renewal for another 2 years and you’re looking at another 5 year fixed at 2.99%:

3 months interest = [(mortgage balance x annual interest rate)/12] x 3
= [($200,000 x 5.29%)/12] x 3
= ($10,580/12) x 3
= ($881.67) x 3
= ~$2,645

IRD = mortgage balance x months remaining in term x [(your rate – current rates)/12]
= $200,000 x 24 x [(5.29% - 2.99%)/12]
= $200,000 x 24 x (0.1675%)
= $9,200

In the above example, (I hope that you are sitting down) your penalty would be a whopping $9,200 .  Do you HATE MATH?  Let us do the estimate for you, check out our mortgage penalty calculator.

But What’s the Benefit?

The benefit and break-even point can be difficult for the average person to calculate, especially when you have so many options available to you.  You can pay the penalty out of pocket or finance the penalty by increasing your mortgage amount; you can keep your payments consistent (therefore paying your mortgage off FASTER with a lower rate) or maybe you’d like to better your cash flow situation and have a lower payment with the lower interest rate!  Having said all of that, you should really speak to a licensed agent to help you figure it out.  Let them do the math!

Other Costs to Consider

If you are staying with the same lender, these charges shouldn’t apply.  However, if you are thinking about jumping ship you may incur a discharge fee to leave (approximately $250), legal fees to re-assign the mortgage (approximately $495-$1,000) and/or an e-registration fee to the tax department (approximately $72.50).  Additionally, the lender may require an appraisal to be conducted on the property.  An appraisal can run anywhere from $100-$250 depending on the type of appraisal required (i.e. drive by or full).  Sometimes the appraisals are rebated by the lenders and sometimes they are extra.  Ensure that you take these costs into consideration as well before jumping into a new mortgage rate

RateSupermarket.ca Week in Review

Bears aren’t the only thing hibernating in the winter months.  Typically there isn’t too much activity in the real estate (and mortgage) market in the first months of the year either.  So, in an effort to win over some business and fill their sales pipelines, many lenders have been offering some incredibly low rates.

**This chart is based on changes over the last week to our Best Mortgage Rates Canada page. Mortgage Rates may vary depending on Province.

It comes to no surprise that nearly half (49.6%) of our visitors are searching for the best 5 year fixed closed rate (due to all of the hype from last Friday’s rate drop announcement by BMO).  However you may find it interesting that the other half (48.6%) of our visitors are searching for the best 5 year variable closed rate; although there hasn’t been any big changes in pricing for the 5 year variable rate it still remains one of the top mortgage searches!  The next most popular searches were the 3 and 4 year fixed products (each at 0.4%).

What’s in store for mortgage shoppers next week?  Stay tuned!

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!!

On January 14, 2012 TD announced a special discount fixed mortgage rate of 2.99% for their four year fixed mortgage product. This followed their announcement of a special six, and seven year fixed rate of 3.79%, and 3.99% respectfully.

The 2.99% rate is available on new mortgage applications made until February 29th, 2012. The mortgage must be funded by April 30th, 2012 and other terms and conditions apply.

This change is consistent with what our Panel of mortgage experts predicted in the January 2012 Mortgage Rate Outlook.  The consensus was that fixed rates would dip slightly during the month as lenders focus on building their pipeline for 2012.

You can view all TD mortgages rates here.

This begs the question…is it time to lock in at a fixed rate?

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.

RateSupermarket.ca’s Expert Panel Expects higher Variable Mortgage Rates as Discounts Shrink

TORONTO, Nov 4, 2011… … Variable mortgage rate discounts have dropped 45 basis points in under two months, despite no change to Bank of Canada interest rates.
The disappearing act isn’t over yet, says RateSupermarket.ca’s Mortgage Rate Outlook Panel for November 2011.

It’s expected that variable rate mortgages could increase as discounts to prime shrink even more in the short term.  The Panel also believes fixed mortgage rates will stay constant; lenders are unlikely to make any hasty decisions given the recent job loss numbers for October and the fluctuating bond market.

Fixed mortgage rates: Unchanged

The financial issues in Europe are continuing to affect Canadian bond yields, which have fluctuated by over 50bps in the last month alone.  Indecision in Greece and throughout the continent is causing people to flock to the safety of Canadian bonds, driving yields down.

With all this action, our Mortgage Rate Outlook Panel members believe the banks are likely to employ a ‘sit and wait’ approach, meaning fixed mortgage rates are expected to stay constant in the short term.

Variable mortgage rates: Up

The Bank of Canada made no change to interest rates at their last meeting. This is expected to be the norm well into the New Year as the likelihood of a double-dip recession continues, especially given the recent increase in the unemployment rate.  This means bank prime rates won’t change anytime soon.

However, our panel members can’t say the same about discounts off Prime.  Disappearing discounts will continue as banks aim for greater profitability.  As a result, the Panel believes Canadians can expect variable mortgage rates to inch up in the short term.

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 Professional

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.

For years now, mortgage savvy folks have been quoting reports that tell us having a variable rate over the long term will save you money.

That makes sense. Variable (also called floating) rate mortgages are almost always lower than fixed rate mortgages by a few percent. In a climate where rates are steady or going down, variable is undoubtedly the place to be to save precious interest rate dollars on your biggest purchase, a home.

But wait… over the past 3 weeks, the fixed versus variable rate debate got a whole heck of a lot more interesting… well, interesting for mortgages.

The discounts on variable mortgage rates have decreased, meaning that variable rates have gone up.  At the same time, fixed mortgage rates for short term products (i.e. 1 to 3 years) have gone down.

You don’t need to be a mathematician to realize that when one type of mortgage rate goes up and the other comes down, the difference between the two shrinks.

Variable rates are sitting at 2.55% (Prime minus 0.45% on Thursday October 13,2011), but you can get a 2 year fixed rate for as low as 2.49%…. hummm interesting!

Why so close together?

It’s simple – banks like to make money.

Variable rates have been near rock bottom for a long time and have become a very popular option for many mortgage shoppers – great for homeowners; bad for banks making small profit margins on this type of mortgage.

So with no change to the Bank of Canada interest rate in sight, the lenders decided to shave a few basis points off of their discount to variable, increasing the rates and their profit margins to boot.

As for fixed rates, remember how we avoided that big US mortgage crisis in 2008? Ever since then, Canada’s been considered a safe haven for investments, and Canadian bonds are popular. That’s keeping yields down and keeping fixed rates low in turn.

As well, banks like it when you lock in, as long-term data suggests you’ll pay more over the life of a mortgage on a fixed rate — and the bank will make more. As a result, banks have been discounting fixed rates lately.

So should I go fixed?

While the Bank of Canada is unlikely to raise rates in the near future, they will inevitable go up, and so will variable rate mortgages. With the differential between the two being so small, now might be a great time to lock in.

You could opt for a short 2 year fixed rate and then go back into a variable rate when your mortgage term is up and hopefully when the discounts to Prime are back to a more respectable Prime minus 1.0%.

Or, it might also be a smart time to hedge your bets and go for a split mortgage and put half your loan into variable and the other half in fixed.

Bottom line: time to compare rates, talk to a licensed mortgage specialist and keep your eye on what’s going on with both types of mortgages. Figure out what your level of comfort with risk truly is, where you want to be in five years, what you can afford, and take charge of your mortgage rate and your understanding of your finances.