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Variable rates hold appeal

Blog by Patricia Houlihan - Personal Real Estate Corporation | June 2nd, 2008

A mortgage broker sent me this article this morning-this might help with some of those extreme waterfront mortgages!

The Calgary Sun 
April 23, 2008 
Variable rates hold appeal 
The Bank of Canada cut its overnight rate by half of a percent yesterday -- now at 3%, it's the lowest it has been since 2005.
The bank rate now sits at 3.25% due to weakened growth in the global economy, reflecting the effects of a sharp slowdown in the U.S. economy and ongoing dislocations in global financial markets.
For Calgary homeowners, however, the lowered rate could mean lower mortgage payments.
"For the most part, the Bank of Canada dropping the prime rate impacts the rate that banks lend to their prime customers," said Gary Siegle, regional manager for Invis.  
"When it comes to the mortgage side of the marketplace, the banks typically price their variable mortgage based on bank prime, so right now a common variable pricing scheme would be prime less somewhere in the neighborhood of 0.6 percent.  
"Today, because the Bank of Canada has dropped its rate, the rate is 4.15 and that would be a good rate for a variable mortgage."
He said homeowners currently holding a variable-rate mortgage could enjoy a drop in their interest payments.
The BoC's next scheduled date for announcing the overnight target rate is June 10, meaning rates could change again -- in the meantime, however, variable-rate mortgage holders will see their rates hold.
But those with fixed rates, Siegle said, may consider making a change.
"At fixed rate today, we're looking at 5.59 as the best five-year fixed rate for the average purchaser or re-financer, so that's a very large spread -- that's abnormally large." 
The difference between fixed and variable rates currently is 1.44%, which could equate to thousands of dollars spent or saved, depending on a person's mortgage.
"That's a fairly large difference to pay for the comfort of having a fixed payment, so we're really thinking now that people might be better off getting into a variable because of that substantial spread," Siegle said.
"It's not normally that large, and what we're seeing in Canada right now is that fixed-rate mortgage pricing has been, I've heard the term 'sticky.'
"They're priced a little bit higher than what we'd normally see."
He said that's due to the subprime market fallout in the U.S.
Pooling and selling mortgages as investments has suddenly become a risky endeavour.
"Most people buying mortgages now are saying, 'Okay, mortgages seem to be riskier than we thought,' and we have found that there are some repercussions in our marketplace as a result of what's gone on in the U.S.," Siegle said.
"Because of the U.S. market, people are saying, 'We want to buy high-quality investments and we're still a little nervous about mortgages,' so that impacts the way we price fixed rate mortgages.
"Right now people have to consider the variable rate mortgage," he said.