Variable Rate Update Dec 8th

Variable Rate Update - December 8, 2010

All variable rate mortgages are affected by changes in monetary policy as dictated by the Bank of Canada. Generally, when the Bank of Canada (BOC) decides to move its “overnight lending rate”, chartered banks and other financial institutions react by moving their prime rate accordingly. I prepared the following summary to help you track the market:


What Happened?

As expected, The Bank of Canada announced this morning that it will leave its overnight interest
rate unchanged at 1%. It also signaled that any future changes to their rate will be carefully considered as threats to the global economy have increased. Following this decision, banks and other lenders are expected to leave their prime rate at 3%.


How Does This Affect You?

Assuming you were comfortable with being in a variable rate yesterday, today’s decision should give you even more reassurance that this is a good place to be in the short-medium term. While fixed rates have inched up over the last month, there is no apparent reason to lock-in immediately. That said, for those concerned about rising rates, a “no commitment” rate hold might be worth securing (see below).

Today’s Average Variable Rate Mortgage: Prime less 0.70% (currently equal to 2.30%)

Variable rate discounts (that is, the reduction below prime) seem to have leveled off after a year of large decreases. If you’ve entered into a variable rate term over the last couple of years, it may be worth switching into a new variable mortgage with a better discount off prime. Figuring this out involves a very straightforward calculation that I’d be happy to assist you with.

Today’s Best “No Commitment” 120 Day Rate Hold: 5 Year Fixed @ 3.79% (Other terms available on request).

Worried about missing out on fixed rates while they’re low? Securing this rate for the next 4 months is as easy as letting me know you’d like to. No obligation, no application, and no credit check necessary.


Outlook and Opinion:
Canada seems to be reluctantly married to low rates over the long term and the typical reasons to raise rates (to calm inflation, to cool off the economy, to keep up with other central banks) appear to be an afterthought at the moment. As long as the Canadian and American Dollar remain close to par, the Bank of Canada will have a very hard time justifying further rate increases. This is because a high Canadian Dollar acts as a drag on the economy while at the same time reduces inflation by lowering the cost of our imports. Today’s rate decision had very little effect on the bond market, signaling that the experts believe low rates are here to stay.
Providing you have risk tolerance and flexibility in your budget to withstand higher payments over time, variable rates will likely provide a larger interest savings over the next five years.

The next Bank of Canada meeting and decision date on rates is January 18th, 2011.