A variable mortgage can be had for as little as 5.20 per cent these days, depending on the institution. On the surface, that looks a lot better than the posted five-year fixed mortgage rate at Canadian banks — now 6.60 per cent, as I write this. But typical discounting will take this down at least a full percentage point, depending on the institution and one's personal credit score. So let's say you can lock in for 5.6 per cent. The question is, should you?
Benjamin Tal, senior economist at CIBC, says his bank's customers were shifting towards fixed mortgages earlier this year when interest rates were rising. Only 17 per cent have variable rate mortgages now, down from 22 per cent at the end of last year. But these days, Tal says people would be well advised to stay variable (and he has recently noticed a shift back to the variable camp). "The likelihood is that short-term rates are falling, not rising," he says. "Given where we are in the economy, jumping to a fixed mortgage may not be the optimal thing to do."
Tal, like many in the financial community, thinks the Bank of Canada will be in rate-cutting mode next year. That means the chartered banks will be dropping their prime rates (now six per cent) and variable mortgage rates will be heading down in lock-step.
He points out that people who go variable can always choose to lock in if they see rates starting to creep up. Choosing a fixed mortgage means you're locked in for the whole term (which can be up to 10 years). Getting out early can be done, but only after paying a big interest penalty.
A few years ago, York University finance professor Moshe Milevsky looked at the 50-year period between 1950 and 2000 to figure out if people would have been better off locking in for five years or staying variable. He found out that the variable camp came out ahead of the fixed-rate camp 88.6 per cent of the time. "The main message is quite simple," he wrote. "Long-term stability has its price."
For update info on mortgage rates go here -
http://www.torontogreathomes.com/ONTARIO_MORTGAGE/page_929364.html
cbc.ca
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