Mortgage Rates

[drlove 37204]

One of the big banks offered me a rate of 4.29% locked in for five years. Good or bad?

[capitalman 3861]

Bad. Right now rates are the lowest ever at 0.25% or close, usually they'll give you that rate plus 1%. If you get a variable mortgage your rate will change along with the prime rate...but if rates start to go up then then yours will go up too, so you have to keep your eye on it and if they go up, THEN lock in if you can.

[dunkinsailor 1220]

latest business news I read said rates are likely to hold steady until June 2010 or so. Go variable 5 year, and when u see rates about to go up, lock in for remainder of term. That's what we're doing.

[Guest C**Tra****er]

Not a good rate at all. Shop around some more and go with the variable rate at this time... you'll have plenty of time to lock it in when the rates start to go back up.

 

With a strong CDN dollar vs the US dollar and almost 0% inflation, the central bank is pressured to keep the prime lending rate low.

[andflemcol 3975]

Check out this article in the Ottawa Citizen. It relates to the housing market in Ottawa but also talks about mortgage rates.

 

http://www.ottawacitizen.com/business/Ottawa+housing+market/2250200/story.html

 

BTW I am in the market for a house in Ottawa.

[capitalman 3861]

And remember, WE MUST get low mortgages so we have more money for hobbying! The girls need us....

[Guest s******ecan****]

Variable is the best long term strategy and has historicaly saved money....but you have to stick to the strategy

 

first off while bank of Canada prime rate is .25 no Canadian Bank offers a variable at .25 plus 1%

 

each bank has its OWN prime rate currently 2.25 (they all set their rate the same) Variable rate mortgages are the banks own prime plus something on top which usually varies from 0 up to 80 bps. TD for example right now offers a 5 year variable at TD Prime (2.25)

 

With a closed variable your payment stays fixed for the interest rate term but your rate can fluctuate. As rates increase less of your payment goes to principal and vice versa.

 

Closed variable offer you the option to "lock in" but what most people don't realize is that does NOT mean you lock in a the variable rate it means locking in a a fixed term rate for a term at least as long as what is remaining on your interest rate term.

 

Example lets say you went with a closed variable today 2.25 today the rate increases a couple of times in the 1st year (lets say to 3%) and you say enough is enough. You won't be locking in at 3% but rather a 4 year or longer fixed rate mortgage (and usually at the posted rate which means no discounts or specials which are always higher although sometimes you can beat them down on this). Branch managers love to see clients coming in to lock in their variables...its almost a bait and switch.

 

Getting a variable only to lock in later is like all season tires, mediocre in all driving conditions excellent in none. As well it means you put yourself in the position of trying to guess where rates will go, time it correctly, and end up guessing right.

 

Going variable at all times saves money because you even out the risk of interest rate fluctuation. Here is why. Essentially all mortgages are variable. If you take a 25 year amortization and renew every 5 years, guess what, you have a variable rate mortgage where the rate will change on you 4 times (once at each renewal). You may get lucky and always renew when rates are low, you may get unlucky and always renew when rates are high, or you may end up in the middle.

 

A variable rate mortgage means your interest rate will change many more times over the 25 year term (typically on average 3-4 times a year sometimes increasing sometimes decreasing). Plus fixed rate mortgage rates are always higher because the bank is building in a risk factor since it is trying to predict what will happen economically during your term, (ie they have lent you money at a fixed rate and are betting that rates won't go higher and causing them to miss out on better opportunities)with a variable they don't have to worry.

 

And before you flame me with stories with what happened to prime during the late 70's and 80's know this. That time period was a blip. Governments in Europe and North America basically decided to pretend inflation didn't matter. They learned a bitter lesson and it took double digit interest rates to kill it off (basically economic chemo). To this day anti inflation policy is still the number one priority of all central banks and it won't take much inflation for them to turn up rates again to head it off. Also fixed rates also skyrocketed and most people that lost their homes in the 80's were people who where in 5 year fixed mtgs @ 5% who where suddenly being forced to renew at 16% (how'd ya like to see your mtg payment triple overnight)

 

The other benefit of a variable is that the payment is usually set at the equivilant of the 3 year fixed rate so when rates are below that you are automatically paying down your mortgage faster, getting out of debt sooner, and reducing your interest rate risk still more.

[drlove 37204]

latest business news I read said rates are likely to hold steady until June 2010 or so. Go variable 5 year, and when u see rates about to go up, lock in for remainder of term. That's what we're doing.

 

I should add, closing won't be until October of 2010. The bank has a builder's package in place which allows them to guarantee the rate for 18 months. That way, I'd get 4.29% effective October 2010 for five years.

[dunkinsailor 1220]

great explanation scott.

 

drlove: I'd say find a forum on financial advice, and see what the "experts" say. Hard to crystalball a year ahead. Unless you hafta commit to the current offer soon, u could always get them to lock it in at 4.29, and then see what the variable market is like when you actually have to sign the mortgage, and pick the better of the 2 then. Is that an option?

 

Like Dirty Harry says "Do ya feel lucky p*...well doya??" :smile: