The Bank of Canada and my mortgage
I have to renew my mortgage in a couple of weeks, but am wrestling with whether to go with a fixed or variable rate. A few months ago, when my credit union called, they guaranteed me a 5.8% fixed rate for three years, with the caveat that if rates went down by the time the current term expired they would give me the lower rate. I said a tentative yes, and this seemed like a good idea as Bank of Canada raised rates a couple of weeks later.
But then the turmoil in financial markets hit, and those jitters have served to somewhat derail the Bank’s obsession with fighting inflation by raising rates. Today’s announcement from the Bank that they are keeping the overnight rate unchanged is indicative of this, when previously everyone (Bank staff included, I’m guessing) had figured on a quarter-point increase.
It would be better for me to go for a variable rate if conditions in the financial markets worsen and the outlook is for a drop in interest rates. My credit union offers a variable rate mortgage, currently at 6.0%, that essentially moves in line with the Bank of Canada’s overnight rate. Back in 2001 we went this path and for three years rode it to ultra-low interest rates, bottoming out at 2.25%. But I would need at least one quarter-point rate cut to make it worthwhile, and it would have to stay below for three years.
On the other hand, it may be that the turmoil in the markets is going to pass, that there will be minimal spillover onto the real economy (as Jim Stanford argues), and the Bank will get back to its hawkish ways. In this case the fixed rate is a better bet to guard against rate increases. In 2004, we went this path and locked in for three years at 4.3%. Given the past six years, a rate close to 6% seems awfully high even though it is still low compared to the 1980s and 1990s.
So, professional and armchair economists, your turn. What path should I take?
It’s my belief that the Fed will have no choice but to try to reinflate the U.S. economy and will do so by aggressively cutting interest rates and drowning the market with liquidity. Canada is in no position to be above par with the U.S. dollar, we rely too much on their business, lower rates and higher monetary creation will weaken the U.S. dollar even further and the BoC will have no choice but to hold or cut in response to any lowering of the U.S. Prime rate.
If you can hold off signing until the next Fed meeting I think I would. If they hold then they are serious about inflation and will let the financial industry take its lumps, sign long term fixed. If they blink and go lower, especially if they go 50pts lower Iâ€™d take the long variable.
Iâ€™d also go variable if I could not wait out the Fed decision. Bernankeâ€™s belief that too little, not too much liquidity caused the Depression means he will risk inflation and more bubbles to prove his theory.
I just did prime – .9%. But this is my first time/try 🙂
We are leading into a US presidential election year. That, and what GAB above offered, should see interest rates fall. I personally don’t see interest rates rising significantly for at least three years. Canada, as much as the BoC says their sole job is to fight inflation, also has to do something to reduce the value of the Loony and the only way to do that is make it less attractive.
Too bad. For once I’m in a position want higher interest rates. That alone is an omen. When I was paying off a mortgage interest rates skyrocketed. I survived that and eventually turned my balance into nice solid black with interest rates that are somewhere between low and pathetic.
It depends. How big is your mortgage and what are the interest costs associated with both options?
i.e. What is the benefit or cost of making a decision?
Interest rates are on the way down in the US and thus here. If you have not locked in yet, try to get a Home Equity Line of Credit. You can carry your mortgage debt there and lock it in anytime.
In the end, I went with the variable rate, which I got at a larger discount than I thought when I wrote the post — 5.65% or 15 basis points lower than the fixed rate. I can move to a fixed rate mortgage at any time for an $85 fee.
My thinking was that following the 50 bp drop in the US federal rate and much uncertainty on the horizon that the likelihood is now greater for Canadian rates to go down rather than up. And with the latest CPI numbers coming in at a modest 1.7% month-over-month, and a high dollar to contend with, this ought to make the inflation hawks at the Bank of Canada settle down a bit.
We shall see.
I wonder what you choice was after all… if you went with variable in 2007, i’m thinking you’re a happy camper!
Here’s our rates in Canada…
I did go variable and currently am paying a sweet 1.65%.
You can get 3.69% on a 5 year fixed through Valueland Mortgages at http://www.valueland.ca. I had a positive experience with them and got P-0.9% variable mortgage when the best I could find elsewhere was P-0.65%.