April 29, 2008
The steady increase in Canadian’s bond yields over the past weeks may be interpreted as indications that interest rates may not stay low for long. Even though the Bank of Canada slashed the trend setting Bank Rate half-a-per-cent age point on April 22, the weekly bond yields have gradually returned to a more normal spread. Read more
April 27, 2008
Canadian banks cut interest rates dramatically yesterday after the Bank of Canada slashed its main rate by half a percentage point and warned that a serious economic slowdown was only just beginning. Read more
April 13, 2008
Fixed or Variable Mortgage?
The reason why some home owners favor variable mortgage is because of the lower interest rates available on variable or floating rate mortgage. As of April 12, 2008 a qualified home owner can get a floating mortgage at Prime less 0.50% to 0.75%. The discounted variable rate mortgage is between 4.50% to 4. 75%. This compared to the 5-year fixed rate mortgage at around 5.50% to 5.70% is about 1% lower.
Saving on interest payment
For a $300,000 mortgage amortized over 25 years, the monthly interest payment for a fixed rate mortgage works out to around $1,866 as compared to around $1,650 to $1,701. The saving on a variable term mortgage is quite obvious and translates into $165 to $216 a month or over $2,000 a year in interest payment saving.
The big Canadian Banks love their customers and home owners choosing variable term mortgage. They are more than willing to compete with the smaller “mortgage bankers” like FirstLine Mortgage, FirstNational, MCAP and others head-on and match their rates. Some banks even offer “open variable mortgage” at similar deep discounts below prime.
Beware of 2 mortgage traps!
What was seldom mentioned by the big Canadian Banks is the discount a home owner will get if and when they switch over to a fixed rate mortgage. There are 2 problems faced by all home owners who signed on a variable closed term mortgage with their banks.
Problem No. 1 - When a home owner’s variable mortgage is a closed term mortgage, he or she can only get out of the contract by paying 3 months interest penalty or the interest rate differential whichever is more. When a home owner converts his or her variable term mortgage to a fixed term mortgage, the discount available is set at posted less 1% or at the discretion of the bank.
If a home owner is getting a 1% discount below the posted rate, he or she is effectively paying around 0.5% to 0.6% more when converting to a fixed rate mortgage. Assuming when interest rates spike up after 1 year, and a home owner lock-in on a fixed term with 1% discount, he or she is paying $125 more in interest a month for a total of $6,000 extra in interest cost.
Problem No. 2 - Home owners are required under the bank’s variable mortgage plan to switch to a fixed rate mortgage not less than 5 years from the time when their mortgages were booked with their banks. Most smaller mortgage bankers have a lock-in period of 3 years. As shorter term fixed rate mortgages are normally priced lower than longer 5-year mortgage, a home owner ends up with a higher mortgage rate when locking in on a fixed rate mortgage.
You have a choice
Some home owners may not be aware on how to avoid some of the problems as mentioned above. There are homeowners who are knowledgeable and actively paying down their mortgages will save thousands of dollars in interest payment. If you do want to know more, please follow this link: pay of their mortgages in one-third the time .
If you like to have more information on getting a mortgage, or any related issues on home financing, you can contact me at 604-721-4817.
April 6, 2008
While Canadian Prime Rate is expected to be reduced this coming April 22, 2008 interest rate-setting meeting by Bank of Canada, RBC’s recent forecast on 5-year bond rates is projected to move up the next few quarters.
The 5-year quarterly rate at 2.89% may be the lowest rate Canadians experience in 2008. As seen from the chart above, the rate is projected to move up to around 4.0% by the end of 2009. Read more
April 3, 2008
Financial Post reported on April 02, 2008 on possible more interest rate cut due to the marked slowdown in the U.S. economy and slower global economic growth:
More interest rates cuts may be necessary to buffer Canada from the impact of the U.S. economic slowdown, according to the senior deputy governor of the Bank of Canada.
The Bank of Canada’s next interest rate decision will be made at its April 22 meeting.
“The most immediate challenge facing the global economy is the marked slowdown in the U.S. economy. Mr. Jenkins added that “it’s important to note that some slowing in global economic growth was necessary.
“Recent healthy economic numbers for January and robust job gains appear to have done nothing to boost the Bank of Canada’s confidence, and we remain comfortable in our call for several more consecutive 50-basis-point eases from the bank.”