Mortgages - Rate Creep?

From the desk of Peter Majthenyi and Andre Semeniuk...

Lately there's been a lot of speculation on when and how high interest rates will go. I don't think any of us thought rates would stay low forever.

I am confident we all recognize that our economy will gradually improve, and along with economic growth comes more realistic mortgage rates, likely in the range of 4-6%, which are still historically amazing.

A better question is "When do we feel they will start to rise?" To date, interest rates have not gone up, yet the lenders have increased their margins on 4 and 5 year fixed terms to take some early profits in expectation rates will begin rising in the near future.

Recently, CMHC (Canada Mortgage and Housing Corp) released their annual analysis that clearly indicates that any interest rate increases will need to be "controlled increases", or in other words gradual increases to avoid any economic shock.

Meanwhile in the US, their economic recovery is very fragile and being undermined by high unemployment. The US Federal Reserve is predicting further declines in home prices and therefore are not expected to increase their interest rates until 2012.

Many studies (see CMHC.ca) have also identified that there is no real estate "bubble" and conversely we are approaching "equilibrium", meaning that supply and demand are coming in line, which will result in more stable home prices.

To complement this data, the results from a recent survey indicated that more than 80% of Canadians were not concerned if their mortgage rate increased by 2-3%. The media tends to make rate increases sound worrisome, but if one takes the time to "pause" and do some simple math it's easy to understand the sky is not falling.

For example, many consumers choose variable mortgages because the Government would have to raise the overnight rate 18 times and it still performs the same as jumping into a 5 year fixed term immediately.

Variable mortgages are not about rates rising, they are about accepting rates will rise and deciding if I want to pay the higher rate now or later, and you guessed it… most would much rather pay a higher rate later. Who would be in a rush to pay 4-5% this year, when they can put that off for another 3-5 years?

Speaking about variable rates. Currently the typical variable rate is Bank Prime less .5% or 1.75%, yet we understand this is not sustainable much longer. In the coming months, we are expecting lenders to price variable mortgages at Bank Prime less .25% or 2%… so take advantage of the maximum discounts right away.

Borrowers that secured a variable in the last year or so that are paying Prime Plus .25% or greater should strongly consider paying their small discharge penalty and changing to a Prime less .5% mortgage immediately… the math definitely works in the borrowers favour!

We are expecting a healthy economy for the rest of 2010 yet less growth is expected for 2011, but at least the worst is behind us. Let's hope our unemployment comes down while our consumer confidence goes up!

To ensure you, or someone you know, has the right "Mortgage Plan" & "Investment Plan" please feel free to reach out to us anytime.

I will share more with you soon… Peter, Andre & Team