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What does this mean to you?
Your monthly mortgage payment will remain unchanged. There is very little risk of the prime rate changing over the next 9 to 12 months.

Should I lock in?
Surprisingly, very few people heeded our words of warning offered in the last Ratewatch to lock in. Rightly so! Although fixed rate mortgages spiked at the beginning of June, up to 4.49%, today you can lock-in around 4.19% and lenders are offering 3.99% on new mortgages. This means that it is only a matter of time before we will see the standard fixed 5 year rate below 4% again. With a very clear downwards trend of fixed rate mortgages and low risk of the prime rate changing, there is no need to lock in your variable rate mortgage at this time.

Merix Financial is a true leader in the Canadian mortgage market. Not only do they consistently offer the most competitive rates in the mortgage market, they also offer the most innovative products, like their 3 year variable rate mortgage (2.35%) and their awesome 50/50 mortgage . Not to mention they have excellent customer service.

I think variable is still the way to go. Here is why (DISCLAIMER: This is my opinion only. I am not offering financial advice. Everybody has different circumstances and mortgages are not one size fits all):

1. You will keep your mortgage payments low. The difference between the average variable rate in today market P+.50 (2.75%) and today’s average fixed rate mortgage (4.49%) is 1.74%. That translates into a difference of $231/month on a $250,000 mortgage amortized over 25 years.

2. If you are willing to pay the monthly payment of a fixed rate mortgage you can opt for the variable and take advantage of your ability to increase your monthly payment by 20%. All the extra money will go toward reducing the principal which will take months if not years off your mortgage and save you interest.

3. The Bank Of Canada has made a promise to Canadians that they will keep the prime rate level until the end of the second quarter of 2010. (Source)There is very little risk that your payments will increase over the next 12 months. With the economic outlook it appears that we may be a very long way away from inflation and recovery so the prime rate may stay low even longer. Lets just assume that you take variable for exactly one year and lock into a fixed 5 year at 5% for the remaining 5 years. The effective interest rate (average) still works out to be 4.53%.

4. Fixed rate mortgages are over priced. As I’ve explained in previous posts mortgage lenders determine their fixed rate prices by keeping a spread on current bond yields. When it comes to fixed rate mortgages you have “one bullet” to shoot. If you take a fixed today… thats it you forfeit the opportunity to do so in the future when rates are lower. By taking a variable you can stay in the game and lock-in in the future when rates are lower. This Toronto Star Article highlights the fact that fixed rate mortgages are over priced and that there is downwards pressure. 

If you would like to discuss your particular situation or can’t make up your mind call our Toronto Mortgage office at 416.461.0204×2 and speak with Christopher Molder.

Take this morning’s paper. The Globe & Mail and Toronto Star each ran an article in their respective business sections about mortgage interest rates. In the Globe & Mail article the author interviews an Ottawa mortgage broker about what he is personally doing. The broker is locking in his ridiculously low variable rate mortgage to curb the risk of higher rates in the future due to inflation.

Then you read the Toronto Star article where numerous economists are interviewed about their predictions for the future. They feel that the recent increase in fixed rate mortgages due to an increase in bond yields was an over reaction by bond investors and that we are certainly not at a critical point where rates will be increasing with speed. We are still far away from inflation and the high interest rates that are associated with it.

My feeling echos that at the end of the Star article… take your time before making any rash decisions. If you are in a variable, have a good long look before you give up your low effective rate. Just because rates have increased doesn’t mean that they won’t come back down. If you are in the market for a new mortgage you may still want to consider a variable because there exists the potential for fixed rates to decrease again… maybe not as low as we saw two weeks ago. If you are really on the fence consider a product like the Merix 50/50 mortgage where you get half your mortgage as a fixed mortgage and the remainder as a variable.

Do you have a question about your mortgage?  Tridac Mortgages has been helping clients for over 30 years. Call our Toronto office at 416.461.0204. Chris Molder. We’re here to help you.