Are mortgage rates headed even lower?
By Gordon Powers, Sympatico / MSN Finance
With interest rates so low and the housing market stabilizing, anxious homeowners are worrying about whether or not to lock in their mortgage payments.
The rate-watching game has been a little more uncertain lately as rates seem to have reached a point where they seem to have little room left to fall. So, given current bargain basement borrowing costs, should you go with a variable or fixed rate mortgage?
Robert McLister, who pens the Canadian Mortgage Trends blog, created this chart to illustrate what your mortgage payment would have been had you opted for a variable-rate mortgage based on prime any time over the last 18 years.
After each low was made, the average rate over the next five years wasn’t that much higher, he says. If you picked the worst possible time to go with a variable-rate mortgage, your rate over the following five years would have averaged just 1.23% more than the rate you received on closing day.
Even though we might see a blip, most economists expect rates to remain low through the end of the year or so, then rise by as much as 3% as a recovering economy produces an increase in inflation.
If the prime rate were to drop a bit further and you were working with a variable rate, you'd see the decrease in your mortgage rate almost immediately. But that doesn’t seem too likely right now. Plus the current financial mess means that the premium on variable rates is higher than the historical norm.
On the other hand, if you lose sleep worrying about the impact of every blip in rates on your monthly budget, then a fixed rate mortgage is still the way to go.
Either way, looking at history this way will help you judge whether it’s worth paying an additional 1.5% or more for today’s 5-year fixed mortgages, McLister maintains.
Posted by: Dale | Jul 20, 2021 11:06:26 AM
the fact that most banks are starting to increase mortgage rates is really driven by nothing more than greed,there is no basis for these increases,consumers are extremely interest rate sensitive,as
we are with gas prices,if the idea is to extend the recession,this is a great way to do it,just like last
year when the phoney oil price spike occured,notice how demand has dropped ever since??you can
screw the consumer once,but you better enjoy it,because it won't happen again.
Posted by: Accter | Jul 20, 2021 1:04:16 PM
Over the last 18 years the rate has fell from around 18% to now around 4% so of course variable has done better than fixed over that time period. However it is inevitable that the rate will rise over the next 10 years as 4% is an all time low for mortgages.
Look at it this way. Right now you can lock in for 5 years for 3.99% (there is probably better out there but that is a major bank quote so its solid). On 100K mortgage over 25 years thats $527 a month. If you wait to lock in the most it could possibly drop is around 1%. Now your payments are $473. Congrats you could save a max of $54 a month. However it is just as likely that rates climb 3-4% to historical norms. In that case (a 3% climb) you will be paying $706. Thats $180 more. Remember in the early 80's interest went to 18%, this can and will happen again.
So really right now there is little upside to rates going down and potential huge downside to rates going up so who wouldn't lock in their rate today?
Posted by: jdogg | Jul 20, 2021 1:17:38 PM
I would normally have agreed with you that over time, variable rate mortgages will do better. Unfortunately, however, times have changed and the gap between fixed rate and variable rate mortgages offered by the banks has shrunk significantly. 5 years ago, I was able to get a variable rate mortgage at Prime LESS 0.75%. I suspect that I would have been able to get that about a year ago as well. Recently, when my mortgage came due, I would have had to take a variable rate at Prime PLUS 0.6%...a swing of 1.35%. That made the fixed rate option for 5 years at 3.85% a bit more palatable for me. With your estimate that interest rates will rise by as much as 3% after a year of continued low rates, it looks like that will pay off well for me as the prime rate only has to go up 1% for me to be doing better on fixed rate mortgage.
At least my mortgage decisions seem to be working out for me...can't say the same for my investments!! :)
Posted by: Wayne | Jul 20, 2021 1:56:39 PM
I agree about locking in if the interest rate is going but at the same time you have to lock in before it starts to go up because if you lock it in now you will have to renew in 5 years. So if rates are low for 1 -2 more years you wasted that time for low rates and will have to renew when it gets higher anyway.
I don't think the interest rates will ever get to 8 % or more for mortgages again because of the way they aremonitored and the cost of housing now.
I started out with fixed mortgages when i first bought my house and now I realized that a variable rate mortgage was always worth it over the 5 years. The best rates are the 5 year open if you want to have the option of locking it in within the 5 years or the 5 year closed variable rates.
Posted by: Wayne | Jul 20, 2021 2:05:41 PM
I forgot to mention that, when interest rates are lower it's always better to pay a little extra to bring down the mortgage so when the rate does go higher you are not killed with the new payment amount.
Posted by: Tim | Jul 20, 2021 2:37:23 PM
There are many arguements over fixed, variable or open. I refinanced March 28,2008, With a 5yr. variable. My mortgage rate then was 4.65%. It is now 1.65%. And it appears rates will stay the course for another year. The proof is in the pudding my friends, luck or not variable is the way to go.
Posted by: Alex | Jul 20, 2021 5:26:02 PM
Got to love varible, i am at 1.25% interest which is great, i got to renew Sept last year at prime - 1.00%, greatest financial move i have ever made.
Posted by: Frank | Jul 20, 2021 9:09:55 PM
I just wish the interest rates could rise again. Low interest rates are only in place to artificially keep home prices high and out of reach for most people. A house is no more affordable today than it was 20 years ago.
Higher interest rates would also help people who are trying to save up so they can buy a house with a decent cash down. Right now the responsible savers are being penalized just to help the irresponsible spenders in debt over their heads stay in their overpriced houses.
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