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.

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.

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 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.

RateSupermarket.ca’s Expert Panel Believes Lenders will Keep Rates Steady

TORONTO, Sept 13, 2011… The experts have spoken and the common theme for this month’s RateSupermarket.ca Mortgage Rate Outlook is higher margins.

Variable mortgage rates increased last month and most of the Big 6 Banks only recently reduced their fixed mortgage rates despite a huge drop in bond yields over the past several weeks.  Lenders are still enjoying mortgage spreads near historical highs.

Ultra low mortgage rates have resulted in unsustainable profitability so lenders are happy with increased margins. As a result, our Panel believes that fixed and variable mortgage rates will stay where they are for the time being.

Fixed mortgage rates: Unchanged

Many non-Big 6 mortgage lenders dropped their fixed mortgage rates weeks ago, while the major banks only started to drop rates slightly this week.  Following positive third quarter results from most of the banks, it seems most will continue to pad their margins versus pushing further into the rate war and going for market share.

Our Panel believes fixed mortgage rates will not change significantly in the next few weeks.

Variable mortgage rates: Unchanged

Variable mortgage rates increased last month as lenders reduced their discounts to Prime citing unsustainable margins. This move followed the Bank of Canada announcement that interest rates will remain unchanged and the consensus is that this will continue for the rest of the year.

Other lenders started to follow suit and cut their discounts to Prime as well, but our Panel of experts don’t see any more changes to variable mortgage rates 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
• Wayne Spinney, Mortgage Agent, Centum Mortgage Professionals

About RateSupermarket.ca (www.ratesupermarket.ca)

RateSupermarket.ca is the largest independent and 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 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.

It was no surprise on Wednesday morning when the Bank of Canada announced that they would maintain their Key Overnight Lending Rate at 1.0 percent.  The announcement means that major banks will keep their Prime Rate consistent at 3.0 percent, which means variable mortgage rates will also stay where they are

The Bank of Canada highlighted a number of reasons for keeping interest rates low, including:

• The European sovereign debt crisis is getting worse
• Global growth has slowed
• Financial market volatility has increased sharply
• The US is not recovering fast enough from the recession

High levels of household debt and unemployment will force US consumers to cut back on spending, further halting growth in the world’s largest economy.

On the home front, the BoC painted a bleak picture: Canadian economic growth stalled in the second quarter; lower wealth and incomes will likely moderate the pace of investment and consumption growth; and, the Canadian dollar continues to be a burden on Net Exports.

Plus, we should expect the economic situation to worsen in the event that global financial conditions continue to deteriorate.

Therefore, there is still a need for monetary policy stimulus (aka super low interest rates) to make it easier to borrow and spend money so our economy can continue to grow.

The next BoC meeting will take place on Oct 25^th, followed by the release of the updated Montary Policy Report on Oct 26^th.

The day I signed my first mortgage, the representative at the bank gave us but a quick skim of the rates the bank was offering at the time. Five-year term, three-year term, variable. She pretty much circled the fixed three-year rate she thought we should sign on for, and we nodded our naive little heads.

I didn’t bother to ask what a variable rate was, and what it would entail. It took me several years, in fact, to ask that question and really start to wrap my head around the difference in the main ways lenders organize their mortgage rates.

Fixed rate

Simply put, a fixed rate allows you to lock in for a set interest rate for a set amount of time. Many people opt for a five-year term with fixed rate mortgages. The idea being that when you sign on, you know what you will pay over the next five years, you can move on and stop wondering about what is probably your biggest monthly expense.

When that term ends, you need to start doing rate comparisons again, find out who’s offering the best deal and either stay with your current lender or change and lock in for another term.

Fixed rates are set by banks and are based on the bond market. Bond yields have been decreasing of late, plus banks are offering discounts, so fixed rate mortgages have recently been very competitive. For the latest rates, see our rate comparison page.

Who goes for fixed rate mortgages? People who are just starting out as homeowners and don’t feel that comfortable with the various products available. This tends to be the product chosen for those with minimal financial literacy — just like me back when I got my first house. As well, if your budget is quite tight and you want to know exactly where you’ll be in five years, this is a more stable option. And if you simply do not like risk, or you think the interest rates are going to rise significantly before your next renewal date, lock in for a fixed rate mortgage.

Variable

Variable rate (also called floating) mortgages offer you an interest rate that fluctuates with your bank’s prime rate. This is based on the Bank of Canada’s key overnight lending rate. Those who are on a variable rate mortgage will often tune in when, eight times a year, the bank announces whether its rate will go up or down (it was increased three times in 2010. The last announcement was in May and the rate still sits at a very low one percent, keeping Prime rates constant at 3 per cent).

You sign on for a set term (usually five years) and you get that prime rate plus or minus a set amount (such as -.95%). When that term expires, you can renew to get a variable rate again, but often the plus or minus amount will have changed.

If the rates start to climb, you can call up your bank and get yourself off the variable train and lock in. This is called converting your mortgage. It’s important to read the terms of your mortgage before you sign on, as there might be time restrictions and fees for converting. As well, the rate you get when you lock in is probably not the best deal in town: you can’t shop around at this point (unless you break your mortgage) and have little leverage in asking your current bank for an amazing deal since you can’t compare rates and leave if you want.

It’s also important to note that most banks will keep your payments the same with a variable rate mortgage, even if the rates go up. That’s good for your budget, but it also means you’re paying less off of your principle if the rates go up and you keep paying the same amount each month.

A past study showed that people who went variable over the lifetime of their mortgages were better off than those who lock in with a fixed rate. Fixed rates are often higher at any given time (it’s almost like you’re paying for insurance to keep your rate the same). But it’s important to note that the study looked at the lifetime of mortgages: that’s not to say you can’t save money in the short term if you lock in at the right time.

In any case, variable rate mortgages are well suited for people who have some financial flexibility and are willing to take a risk. They’re good for people who are disciplined who will make extra payments to keep paying down principle if the rates go up. They need to follow the Bank of Canada and keep assessing, through the many years of having a mortgage, if staying variable is still right for them, or if they think rates are about to skyrocket and they’d like to lock in and be safe for a few years.

Split

To make folks in both camps happy, many banks offer split rate mortgages that let you go variable for part of your mortgage and fixed for the rest. Mortgages with credit lines attached function like this as well. It’s important when shopping for this style of mortgage that you’re getting the best rates for both portions.

Whichever mortgage you choose, take heart that no one really knows what the best mortgage is: right now, or ever. Rates are likely going to climb, but no one knows by how much, and how fast. Only you know what you’re comfortable with for the large loan that is your mortgage.

Diane
Writer for RateSupermarket.ca

Yesterday, we told you how the rate of inflation affects interest rates. While it is important to understand how inflation works, there are several other indicators that are important to watch that also affect mortgage rates in Canada.

The Jobs report is one of the most important economic indicators to have an influence on mortgage rates. The report looks at the number of both full- and part-time jobs, average hourly earnings, and the unemployment rate across the country. Released on the first Friday of every month, the figures help economists anticipate how well Canadian businesses are doing.  Economic growth is dependent on job growth and with job growth comes the opportunity for more consumer spending.  If the jobs report produces a strong result we can expect mortgage rates to stay the same or potentially increase.  If numbers are lower than expected, rates may stay the same or go down.

Canada’s gross domestic product (GDP) is the value of all goods and services produced every year and measured quarterly. The service industry in Canada accounts for more than two thirds of its GDP. If the GDP is low, the Bank of Canada may lower interest rates in hopes that it will increase consumer spending and, furthermore, boost the economy. While lowering the key overnight lending rate does not affect fixed mortgage rates, it will influence variable rate mortgages which are attached to the prime rate.

Canada’s economy is directly affected by the U.S. economy. History shows that Canada is usually a year or two behind the U.S., in terms of economic growth or decline. When the stock market crashed in September 2008, a 5-year fixed mortgage rate in Canada was on average 5.35 per cent. In May 2009, just 9 months later, this rate was as low as 3.75 per cent, a difference of 1.6 per cent. Variable mortgage rates lowered even further, going from 4.75 per cent to 2.25 per cent. While you may not have a particular interest in how our southern friends’ economy is doing, remember that if the U.S.’s economy is declining, it will eventually affect Canada in a number of ways.

Two leading factors as to why our economy is so attached to the U.S. are our exports and the Canadian dollar. The United States is Canada’s largest trading partner. The U.S. purchases as much as 73 per cent of Canada’s exports and 63 per cent of Canada’s imports come from the U.S. A declining economy affects the ability of banks, companies, and consumers to provide goods and services and to spend money. If the Canadian dollar is below the U.S. dollar, importing from Canada becomes more cost-effective. If the Canadian dollar is worth more than the U.S. dollar, Canadian exports become more expensive for Americans to purchase. And if the Canadian dollar’s worth is high enough to be affecting exports, it will also affect tourism and consumer spending within the country. Most Canadians see a good dollar as a time to travel to the U.S. and spend money there. But, again, going back to consumer spending and GDP, if Canada needs a boost, the Bank of Canada could lower interest rates, which will influence variable rate mortgages.

Finally, the number of housing starts is a lead indicator for how the economy is doing. Housing starts are the number of housing units that have been started in a given period of time. A single-dwelling household equals 1 housing start and a condominium development of 150 suites equals 150 housing starts. In Canada, 2010 started off with a large number of housing starts but dwindled at the end of the year. Some experts believe 2011 will see a low number of housing starts, with the new governing mortgage approvals and shortened amortization periods.  The rules of supply and demand play an important role when it comes to housing starts.  In a slow market, if a lot of new homes are being built, demand will be low and supply high, meaning that house prices could decrease.   Typically, if housing starts are high, builders are expecting increased demand from consumers.

Are you starting to see how it is all linked? One thing to remember is that all of these factors are not independent of each other. If jobs are created, people will consume more and, if they have the resources to do so, will want to get into the real estate market. With fewer jobs comes less spending, which starts a decline in the economy, and in an attempt to boost it, interest rates may be lowered to make the cost of borrowing more affordable to encourage consumer spending.   The later response describes the situation Canada has been in for the past few years.  Mortgage rates have been near record lows to spur consumer spending.  Now that the economy is heading in a new direction, we can expect mortgage rates to increase as well.

Caitlin
Writer for RateSupermarket.ca

The Bank of Canada

The Bank of Canada is Canada’s central banking authority. Created in 1934, it is the only issuer of bank notes in the country. Every seven years, the Bank’s Board of Directors appoints the Governor of the Central Bank. The Government of Canada cannot remove the Governor from office, making the central bank an autonomous organization.

Contrary to popular thinking, the Bank of Canada doesn’t actually set Canada’s Prime Rate. The Bank of Canada’s influence protects the Canadian economy from the rise and fall that causes inflation and recessions.  Its purpose is to serve as a reference point for Canadian commercial banks – the five largest Canadian financial institutions, which include the Bank of Montreal, the Canadian Imperial Bank of Commerce, The Bank of Nova Scotia, TD Canada Trust, and the Royal Bank of Canada. Each institution will have their own prime rate (they all tend to be fairly similar), the Bank will discount the lowest and the highest of these rates, then take the an average of the three remaining to calculate Canada’s Prime Rate.

So how are prime rates calculated?

Late at night, after the banks have all closed for the day, the major financial institutions borrow and lend money to each other. In order to settle their transactions for the day, the institutions with leftover money sell it to other institutions that are short. In order to make sure that the major banks trade fairly, the Bank of Canada has set up a special system. This system keeps them within a fair ‘operating band.’ This overnight market is what sets the ‘overnight rate,’ and when the Bank of Canada changes the overnight rate, it leads to changes to the prime rates at specific financial institutions.

When the key overnight lending rate increases, the cost of borrowing money will raise and therefore the prime rate will also increase.

Factors affecting prime rates

A better understanding of the factors that affect the Canadian prime rate will give you a better understanding of the economy as a whole. Factors that affect lenders’ rates include the economy, unemployment, oil prices, inflation, and consumer confidence. There can be a myriad of factors to consider. Understandably, a complete grasp of prime rates can be difficult.

How is the prime rate connected to variable rate mortgages?

The Bank of Canada is a determining factor when it comes to variable mortgage rates, because it sets the key overnight lending rate, but it does not set the final prime rate. Prime rates are determined by individual financial institutions and are based on the cost of short-term funds. If you choose to go with a variable mortgage, the interest you pay is directly related to the prime rate of that institution and will fluctuate as their prime rate does.  For example, when searching for a variable rate mortgage you will be quoted a value based on the prime rate, i.e. prime minus 1.0%.  Therefore, when the prime rate changes, so will your variable mortgage rate.

If rates are not on the rise, a variable rate is a fantastic option. There is, however, no way of predicting when rates will rise or fall. For instance, during a recession banks can be more tight-fisted when it comes to credit. They may worry about losing money and, therefore, are less likely to lend to one another. Interbank lending rates tend to rise when this happens. For homeowners who would like to know what their mortgage payment will be from month-to-month, a variable mortgage may not be the best option.

Choosing a variable or fixed rate mortgage?

There have been many studies done, comparing variable and fixed mortgages to see which is financially best for homeowners. According to Mortgage Financing: Floating Your Way to Prosperity, by Moshe Milevsky, Associate Professor of Finance at York University, there is “detailed evidence that Canadian consumers are better off, on average, financing a mortgage with a short-term floating (prime) interest rate, compared to a long-term fixed rate.” He reports that on a $100,000 mortgage amortized over 15 years, the homeowner, on average, will save $22,000 in interest payments.

As you can see, there is proof that you can save a lot of money by choosing a variable rate mortgage over a fixed rate mortgage, but please keep in mind that while this was the case for many homeowners, there was still a percentage that paid more with a variable mortgage. Always seek the advice of a mortgage expert before making any major financial decisions.

Know your renewal date and plan ahead

If your mortgage is up for renewal, now is the time to compare rates. Signing the renewal letter without shopping around first is the worst thing you could do. In fact, most companies count on this.  Your renewal letter is usually sent out at the last minute, leaving you with little time to shop around. For this reason, knowing your renewal date is very important. Take advantage of the renewal reminder offered on our new iPhone app and you’ll have ample time to make those comparisons.

Rates change, so take advantage of a professional’s advice and choose a rate that works best for you.

Melanie
Writer for RateSupermarket.ca