The End is Near for Record Low Variable Rates!

With the beautiful weather we had over the weekend, there is no doubt that summer is here. Along with the beginning of summer comes the end of the Bank of Canada’s commitment to keep its Overnight Rate, which in turn affects the Bank Prime Rate, at a record low of 0.25% (Prime is currently at 2.25%). Although the B of C had originally committed to leaving its Rate unchanged until the July announcement, at its last announcement it all but guaranteed that the rate will be increasing at its next announcement on June 1st.

Hopefully those of you who have been enjoying huge savings month after month over what you would have been paying in fixed rate mortgages have been disciplined and done something with that savings...either put it down as lump payments or put it aside and invested it. If you haven’t, don’t worry, it’s not too late. Prime has never increased by more than 0.25% at a single time so that means in all likelihood, those paying the going rate of 1.75% (Prime minus 0.50%), won’t see a big jump in your monthly payments and will still be saving plenty over fixed rates. So, start doing something with that savings!

What remains to be seen is what will happen during the B of C announcements over the next year or two. That will be what really determines if being in a variable rate mortgage will have been the wise move over being in something fixed. The Big 5 Banks are all forecasting the Overnight Rate will be increasing by a little over 1% by the end of 2010 and around 3% by the end of 2011. Those are significant increases...the only problem I have with those numbers is that the Banks’ more profitable products are fixed over variable so could they be creating a little fear in consumers to lock into something fixed and not assume the risk that is variable. I’m not saying they’re wrong, I’m just looking at the whole picture of why they are forecasting such significant increases. In my opinion (I’m not an economist, just someone with an opinion), the B of C promised to keep the rate low to stimulate the economy. Now that the economy has picked up, they can’t just hit the accelerator on their rate and assume the economy will react favourably. I believe the rate will go up over time but slowly as the B of C will have to measure the impact to the economy with each increase to ensure the economy can sustain its growth despite rising rates.

Over the last year or so I think the huge discount seen in variable rates has likely attracted consumers who were historically “fixed” borrowers and as a result they saved themselves money. Now that those rates are going to start increasing, it will be interesting to see how the tides shift or if they shift back to fixed rates either for new borrowers or variable borrowers who become nervous about the idea of rates increasing and want to lock into a fixed rate. The good news is there are still excellent fixed rates available. Whatever the result, the fact that the low rates has attracted more borrowers to variable rate mortgages is a great thing because it has opened up peoples’ eyes to the fact that there are lots of mortgage options out there besides the 5-yr fixed that the Banks always lead with.

Whatever your preference, ensure that when it’s time to shop for a mortgage or a renewal, that your mortgage professional shows you all the options so you can make an informed decision for what’s best for you.