30 april 2010
The big banks want homeowners to pay elevated 4.65% 5-year bank rates. (Now we’re talking about the discretionary fixed rates. Speaking about publically announced “special offer” rates, we should note that they are even higher: 4.85%).
With 4.65%, the average 5-year fixed bank mortgage is 156 bp over the Government of Canada bond yield. That’s a large spread for a lender. Just five weeks ago some lenders were selling mortgages at spreads of half of that.
But not everyone’s acting like that.
The 2.90 percentage point gap between fixed and variable rates is wide enough to take the advantage of it. That’s why informed consumers compare today’s fixed rates to prime – .50% variables. Many of them choose the second option.
Here are some quotations about variable rates:
• “If you have some mortgage experience and your mortgage is not as large relative to your income, you should pay with the variable and you will do better over five years from now” (CIBC economist, Benjamin Tal).
• “I always ask the clients to understand that we are expecting a 3% increase in mortgage rates over the next three years” (Mortgage planner, Peter Kinch).
• Ranjit Dhaliwal, mortgage planner, believes variables are more profitable even in the case of a 3% increase in prime rate (BNN).
• “Borrowers with the secured variable, who pay prime plus 0.25% or greater, should really consider the variant of changing to a prime less 0.50% mortgage” (Mortgage planner, Peter Majthenyi)
• Choosing the variable rate “is not the kind of advice I would give to someone who is fairly well mortgaged up with a debt service ratio of 40%.” (Scotia Mortgage Authority’s Jim Smith)
• If you’re satisfied with the variable, “don’t change it, but keep paying as if you were paying a fixed rate” (Peter Kinch).
• “In the coming months, we are waiting for the lenders to price variable mortgages at Bank Prime less 0.25% (or 2% as of today). So it’s recommended to take advantage of the maximum discounts right now” (Peter Majthenyi).
(It’s quite interesting. The majority is expecting variable-rate discounts to remain the same or grow slightly bigger. Peter believes that spreads will tighten, once the rates start rising. On the other hand, some people think that competition will balance the situation).
Even now we can see some banks decreasing the variable mortgage discounts. That’s why we recommend you to consult your mortgage broker to reserve profitable discounts in case you are planning a house purchase in the nearest future or if your mortgage renewal date is coming.