Fixed rates help you sleep at night, but variable rates are making a strong case, for consideration when securing a mortgage!
We have been advised from the Bank of Canada (BOC) for an extended period of time that rates will soon be going up, however the rate hike will not be punitive or significant. The BOC has now finally come to grips with the fact that this rhetoric has been ringing hollow.
The most recent BOC meeting confirmed that the overnight lending rate will remain the same at 1%, keeping the prime rate at 3%.For the first time, in a long time, they have hinted that this will be the norm for an extended period.
With inflation and growth well below their targets and unemployment rates over their target of 6.5% (and the current Canadian unemployment rate is 7.1%), it is not really much of a surprise that the BOC is acknowledging our current economic circumstances. With a weak economic first half of 2013, the BOC has readjusted their inflation targets to 2% which will likely mean we will not see a rate hike until the later part of 2015.
With the variable rate likely to stay constant for a “moderate time period,” property owners or buyers may see value in going with the lower variable rate and keeping the option open to lock in down the road to capture some significant savings.
Fixed rate mortgages are tied to the bond rate. Brand name Canadian banks are currently trending fixed rates at about 1.7% above bond yields. (Currently, in December 2013, as this article is written, rates are at 3.39%). So lets run some quick numbers.
If you were to talk with a top mortgage broker tomorrow (and I would be happy to recommend one) you will find that banks are offering variable mortgages up to prime minus 0.4% or prime minus 0.5% (which would be 2.5% – 2.6%). When comparing this to the above mentioned current 5 year fixed rate (3.39%), you can see the savings of 0.79% which the market will likely follow.
Looking at a $500,000 mortgage, at a 5 year term, and 25 year amortization period, your payments would be $2467 for the fixed rate (3.39%) and $2265 for your variable rate (2.6%), the difference being $202. If for 2 years (until prime were to go up, say in 2015) you choose to “accelerate” your payments by opting for the variable rate, but paying the fixed term rate (in other words paying down the principal of the mortgage an additional $202 dollars a month), you would take 4.9 years off of the total term of your mortgage. This will help you get ahead over the long term! Talk to a professional about your options today!