Jas Grewal's reaction to the recent runup in interest rates was to abandon a sweetheart of a variable-rate mortgage in favour of a safer, but more expensive, fixed-rate mortgage.
Mr. Grewal, you should know, is a mortgage broker. A mortgage broker who sees the potential for much higher rates in the future.
“I'm fairly conservative and I'm locking in,” said Mr. Grewal, of the Mortgage Centre in Toronto. “Rates are starting to spike and I think they're going to continue.”
Variable-rate mortgages like the one Mr. Grewal has are unaffected by rate increases over the past couple of weeks. But fixed-rate mortgages are on the rise, and he's worried about a pervasive trend toward higher borrowing costs. He may have a point -- it may be time to bail on that variable-rate mortgage and lock in for the longer haul.
Ultralow rates are a big reason why there are signs of life in the housing market. Sales activity and prices have been rising this spring; the average resale price of a home sold in May was nearly $320,000, according to the Canadian Real Estate Association, bringing prices back to where they were before last fall's financial meltdown.
But rates are ticking up again. Five-year mortgages with a juicy discount applied are now going for about 4.3 per cent after a pair of two recent rate increases that lifted them off historical lows in the 3.7-per-cent range. Meanwhile, the prime rate, used as a base rate for variable-rate mortgages, continues to sit at 2.25 per cent.
Mr. Grewal's concern is that rising inflation will send short-term interest rates soaring to a point where a five-year mortgage at today's rates will look like a comparative bargain.
Statistically, variable mortgages are a better deal than fixed mortgages 88 per cent of the time, Mr. Grewal said. “But I think we're in that 12-per-cent zone right now.”
Whether you're thinking of locking a variable rate into a fixed-rate mortgage or of renegotiating a mortgage you took out years ago to benefit from lower rates today, you have some thinking to do about rising borrowing costs.
| Mortgage rate comparison | ||||
| You have four years to go on a five-year variable-rate mortgage and are thinking of locking into a five-year fixed rate mortgage. Here's how the payments compare: | ||||
| Variable - Scenario One | Variable - Scenario Two | Five-Year Fixed | ||
|
Mortgage: $200,000 at prime minus 0.5 of a percentage point Rate: 1.75% Biweekly payment: $494 |
Mortgage: $200,000 at prime plus 0.8 of a percentage point Rate: 3.05% Biweekly payment: $556 |
Mortgage: $200,000 at the discounted five-year rate Rate: 4.28% Biweekly payment: $619 |
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| Here's how your payments would look in 24-months if the prime jumps 1.75 percentage points and you haven't locked in... | ||||
|
Mortgage: $171,202 at prime minus 0.5 of a percentage point Rate: 3.5% Biweekly payment: $556 |
Mortgage: $173,628 at prime plus 0.8 of a percentage point Rate: 4.8% Biweekly payment: $621 |
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| Note: a 20-year amortization is used in each case | ||||
There's no consensus that the worst of the global financial crisis/recession is over. Yet, financial markets are starting to consider the risk that inflation will be stoked by all the stimulus that governments are injecting into the economy right now. The net result is that interest rates are starting to creep higher in the bond market, which directly influences the cost of fixed-rate mortgages.
“The general trend toward higher rates, and away from those extreme lows we saw at the turn of the year, is likely to be the dominant theme over the next year as the global economy and global financial markets heal,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
