Time to lock in that mortgage rate?
"First time home buyers are net debtors and they don't want to endanger their finances," suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver. There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind. "The buyer can take a variable rate mortgage but set payments higher than the minimum required" says Parsons. "That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise." Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the "5% CashBack Mortgage," implicitly acknowledges that fixed rate loans can be more costly than variable rate ones. For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal. Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO's analysis shows, "fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now." So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much. There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. "The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates," she explains.. BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO's economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them. | | | Consumer credit experts call on homebuyers to exercise caution The Canadian Press
TORONTO — Potential homebuyers spurred into action by fears of an imminent interest rate hike may be better off to wait and avoid bidding wars that can prove even more costly, according to consumer credit experts. Laurie Campbell, executive director of Credit Counselling Canada, says Canadians already feeling societal pressure to be homeowners are more likely to engage in bidding wars and overspend when they hear that their ability to fulfil that “North American dream” could soon erode. “We’re not only enticed by agents and those who market mortgages and the whole concept but ... society as a whole,” she said. The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise. “They’re overpaying for houses because they’re all trying to get into the market before interest rates go up,” Campbell said. “Especially right now with this whole time bomb of interest rates, for sure there’s a lot of people out there thinking they better get in the market today.” Two bank surveys released Wednesday found that potential homebuyers are feeling pressure to buy homes sooner, but are worried about their ability to pay for their homes when mortgage rates rise. The Bank of Montreal said as many as one-third of respondents in a homebuyers survey believe their expectation that housing prices would increase, and interest rates would soar, left an impression on their decision to make a purchase in the short term. About 15 per cent of potential homebuyers said they have been in bidding wars, and for those who had their housing bids rejected, 14 per cent believe it caused them to overspend on their next offer. “There’s definitely a sense of urgency among home buyers,” said Lynne Kilpatrick, senior vice-president of personal banking at BMO. “While we encourage Canadians to pursue their home ownership dreams, we recognize it’s easy to get caught up in the emotions of the purchase and this can lead to stretching one’s budget too thin.” Meanwhile, Royal Bank’s annual home ownership survey found about 64 per cent of mortgage holders are concerned about higher rates over the next year. Almost three-quarters of homeowners, 73 per cent, felt strongly that homebuyers needed to think ahead to ensure they will still be able to make their mortgage payment if rates rise. The bank said six in 10 mortgage holders said they had taken advantage of current low interest rates to pay more principal on their loans. Most economists say low interest rates are behind the continued strength in the housing market and expect the Bank of Canada to raise interest rates in late spring or early summer. The cost of servicing a mortgage fell 5.8 per cent in February as a result of record-low interest rates, but with many Canadians taking on ever larger mortgages in expensive markets across the country, higher rates could create problems for some. BMO’s senior economist, Sal Guatieri, says that with a cooler housing market “just around the corner,” prudence may be a good choice for many new |