Ross Marowits, THE CANADIAN PRESS MONTREAL
Bargain basement borrowing costs are prompting many Canadians to opt for fixed mortgages even though variable products continue to be a money-winning option for the foreseeable future, industry observers say.
Canadian Imperial Bank of Commerce’s chief economist says variable rate mortgages should produce the greater benefit for the next two to 2.5 years, but be a wash over five years.
“If you’re really risk-averse, jump on those fixed-term rates because they’re extremely cheap,” Benjamin Tal said in an interview.
“Going variable probably will give you good performance for the next two years or so and beyond that, we might see interest rates rising.”
Inflation could ultimately lead to higher interest rates, but likely not before 2011, he said.
Variable rates remain attractive even though banks last fall eliminated discounts and began charging premiums for those who signed up for them after the Bank of Canada lowered its interest rate.
The central bank went even further on Tuesday, cutting its trend-setting overnight rate another a half percentage point to 0.5 per cent. Banks followed by lowering their prime rate to 2.50 per cent.
Bank governor Mark Carney said he now sees recovery coming later than it had projected, possibly in early 2010. And he hinted that instead of further lowering rates, the central bank may consider alternative strategies, including buying back government bonds and other forms of credit from chartered banks.
Homeowners with variable rates, especially those with discounts reaching 90 basis points, should ignore temptations to lock in now, says Vince Gaetano, vice-president of Monstermortgage.ca.
The self-professed fan of variable mortgages said they give customers control, which is important in the current economic climate.
Gaetano said homeowners should use this window of low rates to pay down their mortgages as quickly as possible.
“The key is if you can pay your mortgage in half by the time your variable rate doubles your interest cost is going to be the same on your balance.”
He accused banks of scaring mortgage holders last fall to lock in their variable rates by suggesting rates will rise. The deteriorating economy has only caused rates to fall even further.
“There’s lots of consumers not happy with their banks right now for bad advice,” he said, noting that people who opt for variable mortgages have to be comfortable with fluctuations.
Owners of rental properties, however, should stick to fixed-rate mortgages to balance steady income with stable interest expenses, he added.
Mark Olkowski, Southern Ontario manager of mortgage firm Invis, said fixed rates have dropped so low that new mortgage holders are looking more closely at this option than they did just a few months ago.
“The average consumer is looking at it now and they’re probably waiting for something to trigger,” he said.
If rates haven’t reached a floor, they are probably close to it, added Olkowski, who said he hasn’t yet seen a flurry of people opt for fixed rates.
“We pretty much have a good idea what’s going to happen in 2009. The trick is trying to figure out what’s going to happen in 2010, 2011, 2012 and 2013.”
The beauty of variable rates is that consumers can convert to a fixed rate without penalty.
Mortgage expert Moshe Milevsky of suspects many Canadians will opt for the security of fixed mortgages considering how low rates have dropped.
But he said the decision about what kind of mortgage to take should never be made in isolation of individual circumstances such the amount of equity, value of the house, debts and risk aversion.
And in markets where real estate prices are falling, seeking a long-term rate may be more important than the type of rate.
“The last thing you want to do is have to renew your mortgage in a year from now and have the bank say: ‘Let’s assess what that house is really worth,’ ” he said in an interview.
Studies conducted by Milevsky have determined that variable rates have historically produced greater savings 88 per cent of the time.
“But in today’s environment, you’d be hard-pressed to make a case to continue floating,” he said, advocating a blend between fixed and floating rates.