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Variable rate is based on the Bank Prime, which is what
financial institutions charge to the consumers. Bank Prime is based on
the Central Bank Rate (the amount of interest the Bank of Canada
charges financial institutions for short term loans). As the Central
Bank Rate increases or decreases, so does Bank Prime and in turn the
variable rate.
The 5 year fixed rate is based on the bond market. As the bond market increases or decreases so does the 5 year fixed rate.
If Bank Prime increases, that doesn’t mean that the fixed rate
will increase or vice versa. Since January 2000 the average weekly
Prime rate has been 5.09%. Conversely the average weekly 5 year fixed
rate has been 6.89% during the same time period.
Just a few years ago, it was clear that going with a variable rate
mortgage would save consumers money. But heavy discounts on fixed rate
mortgages and the narrowing spread between short-term and long-term
interest rates have made the choice today less obvious.
Instead of trying to guess where rates are headed, consumers would
do better to think about their own situation. They should evaluate
their personal balance sheets and risk tolerance. The decision of
whether to go short (variable) or long (fixed) will depend on the
consumers’ tolerance for risk as well as their ability to withstand
increases in mortgage payments.
The first time homebuyer or those with minimal down payment
represent the perfect consumer to go long-term fixed mortgage rate. If
the consumer is at or near their maximum GDS/TDS ratios, they cannot
take the chance of increasing interest rates. The worrywart, who is
constantly looking at interest rates and can’t sleep at night wondering
if it is time to lock in, should also go long-term fixed mortgage rate.
The seasoned veteran who has plenty of equity in their home or has
little time left on their mortgage, i.e. 5 to 10 years remaining on
their amortization, can afford to go variable rate and take the risk.
Something to keep in mind is that variable rate mortgages allow
consumers to lock in to a fixed rate at any time without costs. While
there's no up-front cost to the change, not all lenders will lock in at
the fully discounted five-year fixed rate mortgage. Consumers should be
sure to ask their lender if they will get the same fully discounted
fixed rate if they decide to lock in.
Generally, most economists are stating that Bank Prime will be
increasing slightly in 2006 and settle back down in 2007 . Therefore,
if you are at your maximum purchasing power or you’re a worrywart,
lock-in, forget about it, and enjoy life!
November 2007 - rates have gone up this year but are set to come down
in December and January. For more information visit his website at
http://mortgagealliance.ca/davidcooke
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