Variable Rate Mortgages are not All Alike

With the expectation that the Bank of Canada will cut interest rates by 1/2 percent on December 9, 2008, the variable rate mortgage is now becoming more attractive.   Most variable rate mortgages are priced at Prime + 1%.  With the prime rate at 4%, a new variable rate mortgage is priced at 5%.  If the 1/2 percent reduction materializes, variable rate holders will be paying 4.5%.  This is a significant discount to the standard 5 year rate of 5.7%

Note that some mortgage brokers (such as ourselves) have access to a lower variable rate mortgage at Prime + 0.60%.  With this pricing, the variable rate mortgage proposition becomes even more attractive.

While most variable rate mortgages look alike, there are important differences that borrowers need to be aware of:

• Conversion policies – You’ll never know whether you’ll need to lock in your interest rate.  When you do, you’ll want to get the lenders’ best rate, as opposed to their posted rate.  Some lenders guaranty to provide their best rate should you decide to lock-in.
• Compounding – Some lenders compound the interest monthly while other compound the interest rate semi-annually.  Monthly compounding results in a higher effective interest rate.
• Qualifying rate – Sometimes you can’t get approved for a variable rate mortgage since the lender uses their posted rate instead of their lowest interest rate to qualify your mortgage.
• Fixed payments or variable payments – Some lenders fix the payments over the term.  In a period of rising interest rate, the amortization can exceed the original amortization.

Monthly Review of Interest Rate Forecasts from the Major Banks

The Bank of Canada (BoC) dropped their benchmark interest rate twice in October.  The first one, a rate drop of 1/2%, was in conjunction with the US Federal reserve and several European Central Banks.  The second rate drop of 1/4% percent was on their regularly scheduled review on October 21, 2008.  The BoC rate is now stands at 2.25%.

Our roundup of the Big 5 Bank’s economic forecasts show that economists at these institutions are expecting another rate cut on December 9, 2008.  With inflation non-existent and a recession on the horizon, the only question is how much the BoC will reduce their benchmark interest rate.

Here is what the big banks are forecasting for interest rates:

• TD Economics – TD expects a rate cut of 50 basis points in December – TD Economics Weekly Bottom line dated Nov 21, 2008
• BMO Nesbitt Burns expects a rate cut in December (no precentage drop specified) – BMO Capital Markets Focus dated November 21, 2008.
• RBC forecasts 1/4 percent drop before end of year – RBC Financial Markets Monthly dated Nov 4, 2008
• CIBC Wood Gundy expects a 50 basis point reduction in next rate cut – CIBC World Markets Economic Flash dated Nov 21, 2008

New Videos Added to BCMortgage.ca

Two new educational videos were recently added to BCMortgage.ca – “First Time Home Buyer” Video and “Credit Scores – What you need to know about managing your credit scores”.

• First Time Home Buyer Video – We specialize in first time home buyers and we regularly offer home buyer seminars across the Lower Mainland.  For those who cannot attend the seminars, we suggest you listen to this online presentation.  You will learn why you should get into the market, the steps involved, how your qualification limits are arrived and the best way to obtain a mortgage.

• Credit Scores – What you need to know about managing your credit scores – In a world of tighter credit, having a great credit score is one of your biggest assets.  When purchasing a home, it could save you tens of thousands of dollars on interest costs.  Credit scores are used for a variety of types of loans such as credit cards, lines of credit and auto loans and leases.  This is why it is important to obtain the best possible credit score.

To watch these videos, please visit the Video page of BCMortgage.ca