As the economy begins to creep out of its economic rut, the market has begun to speculate on when interest rates will rise. The Bank of Canada pledged in April to hold interest rates at 0.25% until the end of June, 2010. The move was designed to ease credit pressures on financial institutions and consumers as the recession intensified. However, the pledge -- an unconventional monetary policy tool used to keep short-term interest rates and mortgage rates low -- came with an exit clause. If price inflation begins to threaten the economy, the central bank could raise interest rates earlier. But will they? Two economists face off.
Variable rate mortgages are at the lowest rates in history at the moment and for those that took a variable rate over a year ago and received a discount to prime are currently paying a little over 1% interest on their mortgage.
However, those individuals that are looking at getting a variable rate mortgage today are paying a premium on top of the prime rate (anywhere from .30 to .60 basis points). Even with the premium today you are still paying a very attractive interest rate on your mortgage, but what happens when interest rates begin climbing.
The Bank of Canada and the Fed in the US both plan on keeping lending rates low well into 2010 to ensure a steady and full recovery, but after that they will begin raising rates in an effort to control the inflation that goes along with any financial recovery. Keep in mind we have seen prime rates of 4.5% to 5% in the last couple of years and it would not be surprising to see them again.....or even higher.
So, are we going to see large discounts to prime again in the near future? Probably not. So those of you with prime less .90 or prime less 1.0, enjoy it.
However, it is realistic to think we will once again see variable rate mortgages at prime or even prime less .20 or .30. In fact many industry experts predict we will see this happen in the next 6-8 months.
How does this help you if you need a mortgage today? The most effective strategy would be to take a shorter term mortgage (1 or 2 years) and wait until variable mortgages are once again priced at prime less a discount.
Not only can you take advantage of great short term rates today (2.75% for a 1 year mortgage), but when you do get your variable rate mortgage it will most likely have a discount to prime which will help protect you even when the prime rate increases.
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