SCH Featured Post from Conexia Mortgage
Posted by Smart Calgary Homes Blogging Team on Friday, January 20th, 2012 at 9:58am.Today's post is courtesy of Tyler Tost, owner and broker at Conexia Mortgage. It was also a feature in our January 2012 edition of Smart Calgary Homes News! Check it out (and subscribe!) here.
Currently, we are in a very low interest rate environment in Canada. Interest rates move in cycles, right now we are likely near the bottom of the interest rate cycle.
As we enter 2012, the economic forces that have kept our interest rates very low over the past few years will likely continue well into the year. The factors that will have the strongest impact on our interest rates over this year are the ongoing European fiscal crisis, an election year in the US, and the rate of growth in the developing world.
According to the Bank of Canada, Canadian 5-year fixed rate mortgages are almost as low as they were in comparison to bank data starting in 1973. For this reason it is a very good time to be getting a fixed rate mortgage. The reason for the low rates is simple: the demand for money remains low due to economic conditions.
As the economy improves and the demand for money increases, rates will undoubtedly rise. In the meantime, if a person is in the market for a mortgage, there are great options for very low interest rates. Variable rate mortgages have become less attractive in the past few months. There has been a reduction of liquidity in financial markets over the last few months, and this has resulted in a rise of 70 basis points or more in variable mortgage interest rates.
Due to the worsening of variable mortgage interest rates, the debate over fixed versus variable has subsided considerably. Historically, people with variable rate mortgages pay less interest that those with fixed mortgage rates. In normal circumstances, the spread between a 5-year variable rate mortgage and a 5-year fixed rate mortgage is 1.25% or more (meaning the variable rate is normally 1.25% below the fixed rate mortgage at time of application). Currently, with the difference being less .30% between a fixed rate and variable rate, the fixed rate becomes more attractive.
Variable rate mortgages change as the prime interest rate changes. Since the prime rate is also at the low end of the interest rate cycle, variable mortgages will increase as prime increases; whereas an individual getting a 5-year fixed rate mortgage currently takes advantage of their low rate for five years.
It had been forecast that fixed rates would increase throughout the current year, however, the economy has been slower to recover than expected causing interest rates to stay low. As the economy continues to strengthen and more jobs are created, this will put upward pressure on both fixed interest rates and the prime rate.
Given all of the components that affect interest rates, it is very difficult to predict how quickly interest rates will rise once they start increasing. We have enjoyed a very low interest rate environment in Canada over the past few years, but it is guaranteed that the current extremely low interest rates we have will not last forever.
Tyler Tost Broker/Owner
Conexia Mortgage
Phone: 403-698-5008
Fax: 403-698-5009
E-mail: tyler@conexia.ca
Web: www.conexia.ca
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