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Do your homework first… read the fine print – Rate of 2.99 to good to be true?

Although you will never hear any bank say that publicly, this is what is going on. Recently there has been some industry chatter about a few banks offering a sub 3% 5 year fixed product. One particular institution is bragging about their 6 billion dollar portfolio under administration, this product, and how great it is. At first glance you might think ” WOW, that’s awesome!” However as with all mortgages, you have to dig a bit deeper to find out the real nuts and bolts of this sub 3% offer. It’s a great offer alright for the bank, not for you; the consumer.

Based on an average mortgage size of $250,000, that’s 24,000 Canadians that negotiated directly with the bank who will feel ripped off once they find out about their terms and conditions. I am very pro client / consumer, and my job is to look out for their best interests so I simply can’t endorse this product. Consumers though need to know why they shouldn’t either. This product is priced well below the market average for 5 year product, and does not come without it’s “catches”. It’s definitely buyer beware and the bank will not tell you this.

Some of the features (or non-features you might say) are:

Minimal or no pre-payment privileges

This product has extremely low pre-payment features. On a monthly increase basis this could mean nothing to less than half of what the industry norm is. Lump sum payments may also be nothing or less than half the industry norm and if allowed only once per year. Pre-payment features are extremely beneficial and allow for strategies to be put in place. Lack of strategy means lack of interest savings for clients and consumers.

Fully Closed

When I say fully closed, I mean just that. A borrower cannot get out of the mortgage, unless they sell their place if at all. Who wants to sell their place if they want to refinance? I don’t know too many people that would. If borrowers do sell their place, a substantial penalty such as a 6 month interest penalty typically applies.  Borrowers may be offered  a reduced penalty (3 month) if they choose to refinance with that same bank however this still does not offer a borrower access to the entire mortgage market. It also confines them to more inferior product. If a borrower is going to pay a penalty, they rightfully should have the opportunity to entertain superior product. The average mortgage is in place roughly 3 years before being paid out or refinanced. Life just happens. More than likely a borrower will need to do something with their mortgage during their current mortgage term.  To be locked down by these terms and clauses makes absolutely no sense.

No guarantee of best rates upon renewal or refinance

Banks know that consumers may not know the mortgage market at any particular point in time. What’s happening in the mortgage world is usually not on the forefront of people’s minds. When it comes time to renew or refinance borrowers can be offered a rate as high as 1% above the market norm and not realize it. When a borrower asks the bank to do better, they may be offered a discount further however that .5% “special” discount doesn’t look so good when the rest of the market is priced much lower. This amounts to more interest the borrower has to pay over the course of their mortgage. This is more money for the bank that should be staying with you.

Your mortgage will also be registered as a collateral charge.

Beware of this one as it is a very sly practice among banks. What does a collateral charge mean to a borrower? The bank will instruct the lawyer to register the title as a running account. More than likely you running account will have a global limit of the property value itself. This doesn’t mean you are going to get this money, it just means that your property is fully tied up. If you choose another lender at renewal, legal fees apply. A second mortgage or Line of Credit can’t be put behind this product because the bank has tied up ALL of your equity. No matter which way you turn, the bank has shackled you to more costs and fees.

The lesson here is that rate is not everything. Product and Strategy is. Borrowers need flexible product to execute strategy.

Contact me for more information or apply online at



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Bank of Canada hikes key interest rate

The Bank of Canada raised its benchmark interest rate Wednesday by 25 basis points to 1%, arguing financial conditions remain “exceptionally stimulative” even in the face of a slowing — but still growing — economy.

Following the announcement, market watchers said traders reduced the odds of another rate hike for the remainder of 2010 as they focused on the final line in the statement which said any further reduction in monetary policy stimulus would need to be carefully considered in light of the “unusual uncertainty” over the economic outlook.

“This is key … as it appears to indicate the Bank of Canada’s intention to pause the [rate-hiking] process,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York, adding the pause could extend beyond the “next meeting or two.”

Not all analysts shared that view, with some saying the central bank could hike its benchmark rate yet again this year.

In the statement, the central bank acknowledged the economic recovery in Canada would be “slightly more gradual” than envisaged it its most-recent economic outlook, due to sluggish private-sector demand in the United States. However, it said domestic demand was expected to be “solid” and business investment to advance “strongly” — powered by “accommodative” credit conditions that have eased further in recent weeks due to sharp declines in bond yields.

Banks price loans, such as mortgages, based on yields for relatively safe government-issued debt.

“As a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative,” the central bank said.

Consumers continue to take out loans at a steady pace, with central bank data suggesting household credit expanded at an annualized 7.1% pace for the three-month period ended July 31.

Yet, the Bank of Canada said future hikes in its key lending rate, up 75 basis points in the past three months, “would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

Jonathan Basile, economist at Credit Suisse, said reference to “unusual uncertainty” — which roughly mimics wording from U.S. Federal Reserve chairman Ben Bernanke — could be interpreted as a sign that conditions have deteriorated. As a result, Mr. Basile said he expects the central bank would refrain from further rate hikes until the second half of next year.

Conversely, Douglas Porter, deputy chief economist at BMO Capital Markets, said the statement was “more hawkish” than anticipated and suggests the central bank retains a bias toward further rate increases.

“While we had been expecting the bank to now move to the sidelines for a spell, it appears that it will take a deeper slowdown in domestic spending and core inflation than what we have seen so far to prompt them to stop raising rates,” he said.

Yields on government of Canada bonds rose slightly across the curve, and the Canadian dollar shot up roughly US0.50¢ following the central bank decision. As of 11 AM ET, the loonie was up nearly US1¢, to the US96.40¢ range.

Up until Wednesday, traders were largely divided as to which way Mark Carney, the central bank governor, and his colleagues would lean toward in the face of slower than anticipated economic growth. Markets had priced in a roughly 60% chance of a rate hike, and those odds increased from a less than 50-50 chance based on better-than-expected manufacturing and labour data in the United States.

Canadian GDP expanded 2% annualized in the second quarter, well below the central bank’s forecast of 3%. However, analysts have said the economy was stronger than the headline print indicated, as final domestic demand advanced at a robust pace (3.5%). Plus, much of the drag in the second-quarter was from so-called “import leakage,” in which gains in imports — as firms acquired productivity-enhancing equipment at the fastest pace since 2005 — outstripped exports.

Of the GDP results, the Bank of Canada said economic activity “was slightly softer” than expected, “although consumption and investment have evolved largely as anticipated.” The bank said the Canadian recovery would be “slightly more gradual than it had projected in July … largely reflecting a weak profile for U.S. activity.”

Meanwhile, inflation — which the central bank aims through rate decisions to hit and maintain a 2% level — has been “broadly in line” with expectations and “its dynamics are essentially unchanged.”

Mark Chandler, head of fixed-income and currency strategy at RBC Capital Markets, said the Bank of Canada statement indicates the central bank is putting more weight on overall financial conditions than perhaps traders had anticipated, citing the reference to the “sharp drop” in bond yields.

“The bank is saying financial conditions have gotten quite easy, because of the [bond] markets pricing in a gloom-and-doom scenario,” he said. “So by tightening now, it is not such an aggressive move — that’s the bank’s justification.”

In terms of the global economic picture, the Bank of Canada said the recovery is proceeding “but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced countries.” As for the United States, the world’s biggest economy and Canada’s biggest trading partner, the central bank said the recovery in private demand is “being held back by high unemployment and recent indicators suggest a more muted recovery in the near term.”

Economists have scaled back growth expectations for both Canada and the United States, although at the same time boosting the forecast for Europe as its major economies are advancing better than expected following the sovereign debt crisis in the spring.

The central bank is scheduled to provide an updated economic outlook next month, two days following its next rate decision on Oct. 19. Previously, the central bank had forecast 3.5% economic growth this year, followed by 2.9% expansion in 2011. The output gap — a rough measure of the amount of excess capacity in the economy — is expected to close by the end of 2011.

Financial post

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Raise a money-smart kid

What a great article and one we can all take little tips from to use in our daily lives, enjoy the read;

Alex Matjanec was not the kind of kid who spent his entire allowance on candy – his parents would never have allowed it.

But Mr. Matjanec, the 27-year-old co-founder of, is not resentful. In fact, he credits his parents with helping him steer clear of the sorts of habits that can lead to debt and credit problems later in life. “They really did help me financially be smarter and more attuned with my finances and the value of the dollar,” he says.

At his parents’ urging, Mr. Matjanec got his first job, delivering newspapers, at age 9. He opened a savings account at 10 and had his first credit card by his late teens. He now works in personal finance (his website helps consumers make banking decisions and save money) and he urges parents to take similar steps with their own children to put them on the road to financial independence.

“Learning the basics of financial management will set the path for financial health and may keep them out of debt when they get older,” Mr. Matjanec says.

A few of his tips for raising money-savvy kids:

1. Encourage them to apply for a credit card. With set rules – and monitoring– a credit card can help them learn credit and debit management. If you’re worried they’ll rack up big bills, make sure the credit limit is low and consider holding onto the card and allowing your child to use it only in your presence.

2. Open a chequing account for them. Still not sure about that credit card? Transfer spending money into a chequing account for your child. It’s safer – there’s only so much money they can spend – and it will help them understand ATM and standard banking fees.

3. Put your kids to work. A part-time job is a great way to learn some independence and responsibility while still living at home. Starting a job at an early age helps teens appreciate the value of a dollar and promotes smart spending habits. (And why not have teens contribute to their college education?)

4. Set a minimum budget. So many young adults live paycheque to paycheque because no one ever taught them how to budget. Help your children figure out how much they need for the basics. Whatever’s left at the end of the month is theirs to blow.

5. Encourage cash. When you pay with plastic, your wallet never gets any lighter. By getting your kids to spend a real cash allowance, you help them to learn quickly how much things really cost and to limit their spending to what they earn.

6. Watch what they spend. It’s hard to find the balance between cool parent and responsible parent. However, by watching where your kids spend their money you can help them save. If they’re spending $100 a month on fast food, for example, and you show them what they could have purchased for the same amount, they may change their habits.

7. Have them create goals. Saving for the purpose of saving isn’t that exciting for kids. If you agree on a goal, such as a new iPad, and you offer to match what they save, they’ll learn not only the benefits of saving but also how to be smarter with their money. If they choose to blow the money before reaching their goal, they’ll also learn something: no iPad.

8. Set a good example. As they start making money, many teens are going to use their parents as a reference for what to do with that money. If you’re having financial troubles or aren’t managing your own budget, why not establish some rules for yourself as well? Remember, you will always be your child’s most important role model.

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Bank of Canada signals rate increase..

The Bank of Canada has signalled it is likely to raise interest rates in the next few months in response to unexpectedly strong domestic growth, including a housing boom that has shown signs of developing into a speculative bubble.

In its latest monetary policy review on Tuesday the bank said it was maintaining its key overnight lending rate at 0.25 per cent for the time being, but it was “appropriate to begin to lessen the degree of monetary stimulus” with the recent improvement in the economic outlook.

Dropped from the statement was a pledge made repeatedly in recent months not to raise interest rates before the second half of 2010.

“The market is reading that as a signal that they’re going to hike on June 1 [the date of the next policy review],” said Shane Enright, currency strategist at Canadian Imperial Bank of Commerce. “The odds on an early rate hike have increased.”

The Canadian dollar rose above parity with the US dollar immediately after the Bank of Canada’s statement.

The central bank lifted this year’s growth forecast for Canada to 3.7 per cent, adjusted for inflation, from 2.9 per cent previously. However, it now expects the growth rate to slow to 3.1 per cent in 2011, compared with its earlier projection of 3.5 per cent.

The revision was based on stronger growth in other parts of the world, which has boosted the prices of Canada’s commodity exports, the booming domestic housing market and heavy government spending on stimulus projects.

House prices have soared to record levels in Toronto and Vancouver, and bidding wars have become commonplace. The government tightened mortgage lending rules this week in a bid to cool the market.

The Bank of Canada said the extent and timing of monetary tightening would depend on the outlook for economic activity and inflation. It would maintain its 2 per cent inflation target, it said. Meanwhile, it has halted measures to inject extra liquidity into financial markets.

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Variable rates are looking good

Variable rate mortgages are looking good
Variable rate mortgages are looking good

Variable rates are looking good..

 Its a dicey decision whether to break your mortgage or not. Most banks are not encouraging it but in some cases it makes sense.  Anybody who bought their first house in the 1980s must marvel at mortgage rates today, or perhaps not.   With prime rate at 2.25% a variable rate mortgage today is looking pretty sweet. 

 Consumers who locked into variable-rate mortgages tied to prime before credit markets tanked are getting as much as 90 basis points below prime and borrowing as low as 1.6%.   It’s the deal of the century. In October, the banks suddenly changed the rules on borrowing and demanded consumers pay a 100-basis premium over prime if they wanted to go variable. The banks have eased up since and the premium on a variable-rate product is now 30 basis points above prime for a 2.55% rate. It poses an obvious question for anyone who has locked into rates as high as 5.75% on a five-year fixed-rate mortgage:   Should they break that mortgage? “It probably does make sense to break it now,” says Vince Gaetano, vice-president of Monster Mortgage. He gives the example of one client who came into his office this past week with a $205,000 mortgage and a 5.24% interest rate. The customer had 3½ years left on a five-year mortgage. The penalty to break his mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates. In that client’s case, his interest rate penalty is calculated based on the current four-year rate at his bank, now 4.14% on a discounted basis. The lost interest to the bank is about $7,800, which is what the customer will have to pay. It’s a big penalty but Mr. Gaetano argues that if that same customer breaks his mortgage and goes with the variable-rate mortgage at 2.55%, the savings would be in the $13000 to $14,000 range over 3½ years — more than offsetting the penalty.

There is also a nifty little trick you can pull off if you have a prepayment option on your mortgage. Mr. Gaetano’s customer has a 25% prepayment privilege, so he can knock $57,000 off his mortgage and lower his penalty by about $2,800. “You can access [that 25%] from an unsecured line of credit or some credit cards for a few days and reduce your penalty because the penalty is based on the balance outstanding,” says Mr. Gaetano.

While not encouraging people to break their mortgages, the banks are acknowledging that some consumers who locked into higher rates can save money if they refinance at the new lower rates. “I think it does make sense as an option for some people trying to lower their rate,” says Joan Dal Bianco, vice-president of real estate-secured lending at TD Canada Trust.   She says if you are refinancing your mortgage, you can take the interest rate differential penalty and tack it on to your new mortgage. If you have credit card debt, you can add that on too, and the refinancing makes even more sense.

The office of consumer affairs for the federal government has a great site to help you make the decision: Moshe Milevsky, a professor at York University’s Schulich School of Business, who created the calculator used on the government site, says it ultimately comes down to how much money you will save on your mortgage if you break the contract. “To me, it’s pure mathematics. There is nothing speculative or probabilistic about the decision to break a mortgage. It is the classic example of undergraduate finance time-value-of-money calculations. If the homeowner can refinance into a mortgage with an identical term that reduces monthly payments above and beyond any penalty costs, then go for it. Plain and simple,” says Mr. Milevsky. Breaking your mortgage based on a decision to go into a variable-rate mortgage is an entirely different decision. “This decision shouldn’t be confused or muddled with the classic long or short decision, or whether real estate prices or interest rates are headed up or down from here,” he says. So, it comes down to two choices: The first is to break your locked-in mortgage and renew for another fixed term. If it saves you cash, that is a no-brainer. The second choice is whether to switch products and go with a variable-rate mortgage. Historically, consumers have saved money 88% of the time going variable, according to Mr. Milevsky’s own studies. I’m still in the camp that favours a variable rate.  This will not save you any money, but if you are strapped for cash because one of the breadwinners in your home has lost a job, the banks will let you lengthen your amortization period. If you have a 25-year amortization you can lengthen it to 35 years without any service charges — other than the huge jump in interest charges!

If your wanting to calculate a ball park figure, read my post on “calculating your mortgage penalty” it will help you put some real numbers together.

author - Lisa Alentejano
author - Lisa Alentejano
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Could bonds pull mortgage rates down even more?


Could bonds pull mortgage rates down even more?Falling bond yields could spur a slight drop in medium-term residential mortgage rates this summer, but bargain-hungry consumers would be foolish to count on considerably cheaper borrowing costs, experts say.

About a month ago, banks blamed soaring bond yields for two sizeable hikes to key residential mortgage rates.

Those moves drove up posted rates on five-year fixed-rate loans by 60 basis points to 5.85 per cent.

While yields have reversed course in recent weeks, banks have yet to pass on those savings to consumers. Meanwhile, there are fresh signs of life in the housing market, fuelling increased demand for mortgages.

Some economists and rate strategists believe that yields could fall a bit further and speculate that mortgage rates might follow suit. But there are no guarantees and experts surmise those potential declines would be minimal at best.

Doug Porter, deputy chief economist at BMO Capital Markets, says banks will be more inclined to tweak their rates if yields continue heading south

“Typically, they want to be convinced that it is not a flash in the pan and that any retreat in yields is sustained,” he said.

“I believe that we are probably not too far away from that point. It might take a little more of a deeper rally (in bond prices) to make it completely convincing.”

Bond yields move inversely to prices. While variable-rate mortgages are largely influenced by the banks’ prime rates, conventional fixed-rate mortgages are linked to the bond market.

Banks generally try to match maturities when they finance mortgages with bonds. That means five-year mortgages are paired with five-year bonds.

Earlier this year, banks were confronted with a sharp spike in their own borrowing costs. Yields jumped after a flurry of better-than-expected economic data. At that time, traders were also focused on the threat of inflation as governments issued massive amounts of debt to stimulate growth.

Central banks usually try to control inflation by raising interest rates and the market was betting the U.S. Federal Reserve would hike rates this year.

That sentiment, however, has since soured.

Last week’s disappointing U.S. jobs report is among a string of more recent indicators that dampened earlier expectations of a snappy recovery.

The yield on the five-year Government of Canada bond peaked at 2.82 per cent on June 10. Yesterday, it closed at 2.39 per cent. Experts say it is impossible to predict how much lower it could go.

“I think most of the juice has been wrung from this move. I would still say the risk is that yields could fall a bit further, but I think we’re well past halfway,” said Eric Lascelles, a rates strategist at TD Securities.

Benjamin Tal, CIBC’s senior economist, thinks another 5 to 10 basis-point decline in yields is likely. He agrees that might cause mortgage rates to dip but believes the discounts will be minimal and short-lived. “By the end of the year, we’ll start seeing rates rising.”

Mark Chandler, a senior fixed-income analyst at RBC Capital Markets, stressed that other factors also influence mortgage rates, including higher demand and recession-driven risk premiums.

Even if rates don’t budge, they remain near historic lows, observed Jim Rawson, Toronto regional manager at mortgage brokerage Invis.

“I know that people are so rate-conscious these days, but really when it comes down to what (falling yields are) really going to mean for you on a monthly basis – it is really nothing


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Your line of credit just got jacked

Your line of credit just got jacked
Your line of credit just got jacked

What’s going on with your line of credit?

It is most likely rising, much to the chagrin of many Canadians who thought it would continue to track the Bank of Canada’s key benchmark rate, percentage point for point.

Edmonton machinist Neil Gordey found that out the hard way, when he got a notice last month that his line of credit was going from prime, up to prime plus one percentage point.

“Can they do this? After entering in to an agreement with them for a product at a decided rate, can they simply change the terms like they did?” asks Mr. Gordey, who had taken the remaining loan amount on his variable-rate mortgage and rolled it into a line of credit for better flexibility.

The answer to that is that it depends on your contract. But know this: The bank can change the rate and some have raised it on credit lines because their own cost of capital has gone up.

Some, such as the Canadian Imperial Bank of Commerce and the Bank of Montreal, have done just that. TD Canada Trust has chosen to “grandfather” customers whose rate was set before the credit crisis.

The good news is that with prime at 2.25%, customers with strong credit are still borrowing at 3.25% if their loan is secured by something such as a house. In the end, you might be better off because prime at most of the major banks was above 3.25% just seven months ago.

The outstanding loan amount on lines of credit has exploded over the past year, jumping by 20%. “I think consumers realize there is a deal out there that they might not be able to get later,” says Benjamin Tal, senior economist with CIBC World Markets.

Mr. Gordey is one of the unlucky ones because he had a variable-rate mortgage that was negotiated at .375 percentage points below prime, but he switched to the line of credit. Instead of borrowing money at just above 1.85%, his loan is now 3.25%.

The difference between the rules on a variable-rate mortgage versus a line of credit are subtle but important. Most consumers taking out a variable-rate mortgage agree to a term with the rate calculated based on prime. These days, that’s about 100 basis points above prime. Before the credit markets blew up, it was 60 basis points below prime.

“Historically, a lot of lines of credit have been priced right at prime,” says Gary Siegle, a mortgage broker and Calgary regional manager with Invis Inc. “The typical range has been from prime, to prime plus two [percentage points], depending on your credit.”

Mr. Siegle says credit lines are great for consumers because they operate like credit cards, but with nowhere near the same interest rates. And, unlike mortgages, you can opt to pay just the interest.

The downside? Most lines of credit are callable upon demand, even if you have not defaulted. Most mortgages are not. To keep this point in context, it is almost unheard of for a Canadian financial institution to call in a consumer line of credit that is not in default.

The major difference is your rate and the bank’s ability to change it on a line of credit versus a mortgage.

Variable-rate mortgages are tied to prime, which banks can set at any level they want. But the reality is, Ottawa has leaned on them to keep the prime rate moving in step with the Bank of Canada’s rate, regardless of the cost of debt. There were a few hiccups in the fall, but the banks played ball as rates have been lowered.

Lines of credit are a different story. At Bank of Montreal, they are calculated using what is called “the base rate,” which is a combination of the prime rate plus whatever discount or premium the bank is willing to offer customers.

Unlike consumers with variable-rate products, who have contracts that specify they get a certain discount off of prime, the rules on a credit line tend to be looser and allow the banks to raise your rate as their costs go up.

“Our base rate has been adjusted. All the banks have done it because of our cost of funds,” says Laura Parsons, area manager of specialized sales for Bank of Montreal in Calgary. “The base rate can move. It is prime plus something.”

The “something” is something to think about.

Dusty wallet Is your interest rate calculated on a daily, monthly, quarterly, semi-annual or annual basis? It can make a difference in your effective interest rate. On a 4% mortgage, if interest is calculated daily, the effective rate is 4.0808%. If it’s calculated monthly, it’s 4.074%; quarterly, 4.06045%; and bi-annually, 4.04%. How your interest is calculated becomes a much bigger issue as you get into higher rates

Financial Post

Side note: We still have variable rate mortgage available between prime plus .40 and prime plus .60 so effective rate for your variable rate mortgage is between 2.65% and 2.85%.  Line of credits are a different type of credit vehicle and not for everyone, they do have some more flexibility with things such as interest only payments and if you need credit in the future your dont have to go back to the bank to access it.    Credit lines are priced at more of a premiume at prime plus 1% and higher today.