Friday, December 11, 2009

Interest rate announcement and variable rates

Hello, this is an interesting discussion about the current interest rate environment.
The Bank of Canada announced this morning that it will maintain its key policy rate at 0.25 (the rate the determines prime rate), therefore, the prime rate remains unchanged at 2.25%, as expected. They also reiterated their commitment to maintain this rate through to the end of June, 2010 after some previous talk that they may look at raising the rate earlier.

When they do start raising the prime rate at start of the third quarter 2010, they are anticipating a 1.75% hike by the end of 2010 which would set the prime rate at 4.00%, and that is just the beginning as we can expect to see further rate increases throughout 2011.

With the inevitable prime rate hikes just around the corner, locking into a 5 year fixed rate makes more sense then ever. While there are stats indicating that the vast majority of the time, home owners have always come out ahead with a variable rate, we are now in an unprecedented time. That being said, history cannot be and should not be considered when making the decision between fixed and variable.

One thing that is certain, is the direction that rates are heading and the precipitous increases that are expected. While most variable rate mortgages can be converted to a fixed rate at any time without penalty, you may be given posted rates in place of discounted rates, should the switch take place.

If you still think a variable rate is for you, then it is important to check with your mortgage professional to find out what the lenders policy is on this. Secondly, fixed rates are determined by different factors then prime rate, so while we know exactly where the prime rate is headed over the next few years, fixed rates are much harder to predict and may start increasing much sooner, and can do so at any time.

With today's lowest available 5 year fixed being 3.68%, it can be difficult to recommend for anyone go with a variable rate, even if they expect to switch to a fixed before the mid-year increases. If you did plan on switching, you would only be able to reap savings for a few months before switching and the fixed rate they would be locking into will almost certainly be quite a bit higher then what is available to you today.

From Paul Meredith

I hope this finds you Happy and Healthy!

All the Best!


A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate

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