Mortgage rates on the rise?Posted on: Nov-06-2009
Last chance to lock-in at incredibly low mortgage rates? Perhaps. Certainly the caution flags are flying high.
Coincident with the expectation of a North American economic recovery, Canadian banks are finding their borrowing costs for longer-term funds increasing. Mortgage rates, as they usually do, have followed suit.
In the past several weeks most major lenders have moved their posted 5-year mortgage rate up to 5.84 per cent, a dramatic upswing from just a few months ago. Remember however, these rates are negotiable with most lenders, often very significantly. You wouldn’t pay full list price for a vehicle. If you have a good credit rating, why would you pay the posted rate for your mortgage?
If you are looking for either a new mortgage or to renew an existing one, do not sign on the dotted line without first checking out other lenders, especially mortgage brokers. In conversation with a neighbourhood mortgage broker in Sidney, I learned that a 5-year, 3.85 per cent rate is still available, though perhaps for not much longer.
Check the impact on your wallet of differing quotes by various lenders. Access any online mortgage calculator found on lender websites. For example, I found that a $100,000 mortgage at 3.85 per cent with a 25-year amortization, costs $518 per month. On the other hand, the recently posted rate of 5.84 per cent results in payments of $630 per month. This is a difference of $112 monthly for 60 months, for a total of $6,720 over five years. Certainly worth the small effort to shop around and compare.
One other important mortgage-related change has emerged over the past month or so. While longer-term fixed rates have risen, variable rates have declined from a recent high of one per cent over prime, to prime rate, which today sits at 2.25 per cent. While this is not at the record low one per cent below prime that we saw before the financial market crash of late 2008, it’s once again low enough that borrowers should seriously consider the variable-rate option.
The same 25-year $100,000 mortgage loan at the current variable rate of 2.25 per cent would further reduce monthly payments to $436. Remember though, selecting the variable-rate option results in exposure, for the term of the loan, to any increase in the prime rate. Some variable-rate mortgages do offer partial protection, by providing the opportunity of locking in to a fixed rate at a future date.
Studies have shown that over the past 50 years, the variable-rate option was better for borrowers than fixed-rate choices, about 89 per cent of the time. The one caution however, is that historical prime rates were never as low as today. There is little room for today’s rates to drop, but significant likelihood of their moving upward.
Variable-rate mortgages, having returned to relatively attractive rates, at least deserve serious consideration by borrowers.
Always keep in mind that selecting the best mortgage option for you, and negotiating the lowest-possible interest rate, often have a far greater impact on your lifestyle than does achieving a reduction of a few thousand dollars on the purchase price of your home.