Don't rush into fixed-rate mortgage, experts suggest as rates rise

16:41:56 EDT Apr 25, 2006
TARA PERKINS
TORONTO (CP) - Tuesday's rise in variable mortgage rates will have some homeowners looking to lock in their rates, but experts say not to be hasty. It could be just a blip.
The cost of a variable mortgage has risen for the sixth time since the summer, after the Bank of Canada announced Tuesday it is hiking its benchmark interest rates by a quarter-point. About 22 per cent of Canadian mortgages are now variable, moving in step with the bank's prime lending rate, says CIBC World Markets (TSX:CM) senior economist Benjamin Tal.
Andrew Moor, CEO of mortgage brokerage firm Invis, says more customers have been opting for fixed-rate mortgages over the last few months as interest rates have risen.
But, he adds, the carrying costs on a variable mortgage are still less than those on a fixed-rate mortgage.
After Tuesday's rate hikes, a competitive variable mortgage rate will be about 4.85 per cent, up from 3.45 per cent at the beginning of September, according to Invis.
As a result, the payments on a $150,000 mortgage will have risen from about $745 a month to about $860.
A five-year fixed mortgage could be obtained at 4.5 per cent in September. That would cost about $830 a month on a $150,000, 25-year mortgage.
Today the rate is more like 5.25 per cent, costing $894, Invis said.
Within hours of the Bank of Canada's announcement Tuesday, mortgage lenders were already posting new variable mortgage rates that were up by a quarter of a percentage point.
"Every time something happens with the rates, there are people who decide, instead of going variable, to go fixed," said Jim Rawson, a regional sales manager for Invis working in downtown Toronto.
But he said economists don't expect the Bank of Canada to continue its credit-tightening policy for much longer.
"It may be a blip in the market and, therefore, you may not need to worry about going into a fixed term if you're used to playing the variable game," he said.
"There's really no need to panic. For those who are finding that it may be a bit of a pinch, there are things like longer amortizations."
He said stretching mortgage payments over a 30-or 35-year window may be a good temporary solution for young homeowners who need to reduce their monthly payments in the short term but know they can increase them in a few years when their salaries are higher.
"It comes down to your risk tolerance," Rawson said of the final decision on fixed-versus-variable mortgages.
"If you're the type of person who is going to lose sleep worrying about rates ... take a fixed-rate mortgage. It's not worth it if you're going to be worrying about it every day. But there are savings to be had with a variable-rate product."
Moor added that steep competition in the Canadian mortgage market has been good news for consumers.
"The pricing of variable-rate mortgages in Canada is becoming very competitive, and in fact Invis has witnessed mortgage lenders battling for market share by offering variable-rate mortgage rates well below prime - discounts not previously seen in the Canadian market," Moor said.