Monday, April 1, 2013

Where do mortgage rates go from here?



Here's a great article explaining what's going on with the current mortgage interest rate environment. As per the author, interest rates are unbelievably low right now and yet, the housing market is cooling in much of the country. That being said, the Prairie Provinces are "poised to avoid the downturn". Good news for us. 

What happens when interest rates inevitably begin to rise*? Marr states that it’s not a stretch to think the rate on both the 5 year and 10 year fixed rates "will climb two percentage points. And what of the prime lending rate? It’s still 3% but tied to the Bank of Canada, which has been threatening to raise rates for months."

While rates are expected to remain low for some time, it's imperative that "people really need to plan for a rainy day when rates will go up and that means having enough money to cover a mortgage based on that higher payment." My advice would be to set up automatic extra payments on your mortgage. Even though you may be paying less than 3.00% on your current mortgage, you would reap a number of benefits by setting your mortgage payment as if you were paying 5.00%. The benefits are twofold. First, you will pay your principal outstanding balance much quicker, saving thousands in interest over the life of your mortgage and shortening your remaining amortization (how long it will take you to pay off the balance in full). Second, you will be prepared for the eventual rise in interest rates because you have been paying your mortgage as if you had a higher rate all along. If you would like to figure out what your mortgage payment would be at 5.00%, please visit the calculators section of my website. 

If you have any questions about how to best take advantage of today's low interest rate environment, please feel free to get in touch with me anytime.

*How Are Mortgage Rates Set?

The Bank of Canada sets what is known as the target overnight rate. This overnight rate doubles as the interest rate chartered banks are charged to borrow money. In turn, banks use the overnight rate to set their prime lending rate - the rate they offer their best customers. When the Bank of Canada changes its overnight rate (they revisit it about eight times a year) it signals to the banks that it wants them to adjust their prime lending rates. Variable mortgage rates and lines of credit move in conjunction with the prime lending rate.

Fixed-rate mortgages are a little different. Banks use Government of Canada bonds to raise money for fixed-rate mortgages. In the bond market, interest rates fluctuate more often because they're subject to the changing moods of traders and bond investors. These people are constantly trying to figure out how fast the economy will grow and where inflation is headed. Tip: Watch the bond market for clues on where fixed mortgage rates will go next.

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