With the move in the bank’s prime interest rate upward for 2 months in a row, mortgage consumers are looking at whether they should choose a fixed rate mortgage or a variable rate mortgage.
Fixed rates, which are tied to the interest rate paid on the Government of Canada 5 year bond, have softened resulting in some minor downward changes in 5 year term fixed interest rates for closed mortgages. In fact, we are seeing small declines in the 5 year fixed interest rates with current offerings at 3.79% for both purchases and re-financing. A couple of months ago we had only one lender at 3.79% with the majority above 4%.
Variable interest rates are directly tied to the bank’s prime interest rate, currently at 2.75%. The one consistent prediction by both economists and forecasters is the bank’s prime interest rate is rising and, in the long term, will continue to do so. Bank of Montreal is forecasting an additional 0.25% increase before the end of 2010, plus another 1.5% increase for 2011 taking the bank’s prime interest rate to 4.5%. The Bank of Montreal then forecasts the rise in interest rates to continue with the bank’s prime interest rate reaching 6% in 2015. Therefore using Astrum’s prime minus 0.9% 3 year variable interest rate mortgage as an example, the borrowing cost would be 5.1% in 2015.
What does this mean to a borrower? Well, today you can obtain a 3 year term variable interest rate closed mortgage at prime minus 0.9% or 1.85%. For example, using a $250,000 mortgage with a 25 year amortization period the monthly payments equal $1,040.62. In 2015 assuming the same mortgage is available, with a forecasted bank prime interest rate of 6.0% minus 0.9% equaling 5.1%, the monthly payments are $1,468.28. This is an increase of $427.66 per month or an increase of 41% in the monthly payment.
You might ask, won’t the 5 year term fixed interest rate move up as well? Yes, the 5 year term interest rate will move up, but not by the same incremental amount as the bank’s prime interest rate. In July of this year, the major Canadian banks issued independent forecasts which showed an average increase in the Bank of Canada overnight rate to 2.57% which correlates to the bank’s prime interest rate increasing from today’s current rate of 2.75% to the 4.5% - 4.75% range by the end of 2011. During the same time period, the same banks forecast the interest paid on the 5 year Government of Canada bond to rise 1.06% to 3.59% which equates to a 5 year term mortgage rate of 4.75% - 5.00% compared to a 5 year term fixed mortgage rate of 3.79% - 4.09% today. The key point here is the bank’s prime interest rate is forecast to increase nearly 2% by the end of 2011 while, during the same time frame the 5 year term mortgage rate is forecast to increase 1.25%. If you accept the general concept put forward by this forecast, the interest rate difference between the variable rate mortgage and the fixed rate mortgage is becoming less and less.
As stated by some economists and financial analysts, the variable rate mortgage is an excellent product during a declining interest rate cycle, but during an increasing interest rate cycle the fixed mortgage interest rate may offer some advantageous benefits. At Astrum we have the expertise and resources to respond to your questions which will assist you make the decision that will allow you to sleep at night.
David Pylyp You can click here for the lowest rates I have seen recently from a virtual lender. The clients that purchase or sell with me ( available to the Purchaser's of my listings) has a huge competitive difference if you are buying a property and can save an additional $500 per month on interest costs alone.
This is limited to my clients only. Would you like to become my client? Give me call at 647 218 2414 or email David@davidpylyp.com
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