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.