The Refinance Band Wagon

Are we all jumping on the refinance band-wagon to quickly?  These historically low rates that we are seeing are here for a while…the Bank of Canada has vowed not to increase rates for at least a year, and maybe beyond this.  

As long as our economy continues to experience the downturn that its in, the rates will remain historically low.  Eric Lascelles, chief economics and rates strategist at TD Securities: “My inclination is to say mortgage rates are likely to remain unusually low for some time.”  Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals: “I don’t really see rates moving a whole lot.”

Typically, five-year fixed mortgages are pegged at 1.1 to 1.2 basis points above the five-year Government of Canada bond yield.  With the financial crisis of the past 18 months, this difference has increased, to upwards of 3 points; however it is falling now to clower to 2 points and will continue to fall.  This allows room for further mortgage rate decreases.

Variable-rate mortgages are slightly different, they operate off of the Bank of Canada’s prime lending rate.  While 18 months ago and longer you could get variable-rate mortgages at prime minus, we have seen in the last 18 months move to prime plus.  However, as with the fixed-rate mortgages, the trend is falling back to pre-18 month ago trends.  Some Lenders are looking at variable-rate mortgages at rates closing to prime.

So, is now the time to lock in your variable-rate mortgage?  In short, no.  Because the Bank of Canada has committed to keeping is prime lending rate steady for as long as a year, while facing the worsening state of our economy, Lending institutions will also follow suit. However, if you have a more recent variable-rate loan, one with a rate of prime plus greater than 1, perhaps you should look at locking in to 5 year fixed rates.  Fixed 5 year rates are at about 3.75%, allowing people a very low interest rate to lock into for 5 years, versus floating with the variable-rate through the next 5 years.  This all depends on your financial situation and your risk-tolerance level.

With historically low rates, there are a number of scenarios that we should all be considering.  Penalties for breaking a mortgage term that is only a year or so old are very high, however this can often be rectified through blended mortgages, taking advantage of lower rates, and waiting until you are further into your term.  Just remember, that these rates are indeed historically low, never before seen interest rates, that will definately not last forever!