Feeling pushed into a fixed rate?

Oct 21, 2009

Canadian banks are trying to convince consumers to lock in their mortgage rates because more than 20 per cent of the home loans they have negotiated have become unprofitable, according to industry sources. The push has come after the banks cut the discount they offered to consumers with variable rateproducts tied to the prime rate. Two weeks ago, a consumer could get a variable rate product at 0.60 {ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8} below prime; today it is 1.00{ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8} above prime. Banks are scaring people and those people are calling us asking whether they should lock in. The advice most experts are giving is pretty emphatic. Anybody with a mortgage negotiated in the past two years would be out of their mind to lock in to, say, a five-year term. They would be going from a rate as low as 3.35 per cent to 5.79 per cent. Lines of credit previously negotiated at a rate below prime are also still valid. If you’ve got a mortgage rate negotiated below prime, you have a dinosaur. It doesn’t exist anywhere. You should hold onto until the end of the term. Some suggest the banks propped up all their rates 160 basis points because they knew the Bank of Canada would be lowering rates. Last week, the Bank of Canada lowered interest rates by 50 basis points (.50{ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8}) and today another 25 (.25{ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8}) only to see the major banks cut their prime lending rate by half that amount with the first decrease. After some pressure, most of the banks cut their prime lending rate by the full 50 basis points. With a cost of funds generally above four per cent because of the lack of liquidity in the market, the mortgages previously negotiated ended up below water after the latest rate cut. Prime is now 4.00 {ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8} at most major banks but two weeks ago the bank was offering a variable rate of 60 basis points below prime, meaning the consumer was borrowing at 3.40 {ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8}. For those now entering the housing market, the rate is 5.00 {ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8} for a variable rate product but that might not be high enough. Some banks claim they are not making much money on those, if anything. The move into variable mortgages tied to prime has come in the last five year with many of the banks promoting products that allow consumers to float with prime but lock in a rate at any time during the term of their mortgage. The Canadian Association of Accredited Mortgage Professionals says, as of 2007, 21 per cent of mortgages were variable rate, 72 per cent were fixed rate and seven per cent were a mix of the two. Another key question going forward for consumers will be whether the prime rate at the banks will continue to move with Bank of Canada’s rate and nobody is guaranteeing that.