What is happening with the interest rates lately?

Over the past couple of months, two significant changes in interest rates have affected the mortgage industry.  One of them is related to the increase in variable rates. Not the increase in Prime rate, but rather a decrease in discounts given on variable mortgages. A few months ago, one could easily get Prime - 0.9% or so on the market, while these days variable rates are offered in the neighbourhood of Prime. Why such a change?

Well, it ultimately comes down to money, of course.  Lenders were ready to accept low profit margins knowing that these profits will rise once the prime rate rises. However, as the Bank of Canada announced that they are not planning to increase the prime rate any time soon, lenders had to respond by decreasing the variable mortgages` discounts, hence increasing the pricing on new variable mortgages.

The other significant change has to do with the recent lowering of the fixed rates. Historically, fixed rates have never been this low.  The reason behind this is...

What does this mean for those who are thinking whether to go variable or fixed? While the variable rate is still lower than the fixed one, the difference is some 0.5% on average. Compare this to  1.5% difference that was applicable over the past few years. 

Let`s take a closer look at it. If you had a choice to chose variable rate in the past, the prime would have to go up by 3%  over the 5 year period for you to start losing money by going with variable instead of fixed (1.5% to reach the fixed rate, and another 1.5% to exceed it). That was quite an aggressive growth, and was worthwhile the risk associated with it. But now, the prime would have to increase by only 1% before you start going negative with the variable rate. Not such a deal anymore, right?

And while we are not expecting the variable to go up in the next year or two, it will eventually go up. Just some food for thought.

 



### Posted on: January 15, 2012 by Tino Brelak.

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