What the Rate Cut Means for Mortgages
The latest rate cut means consumers buying a house can borrow for as little as 3% interest on their loan if they are willing to buy into the Bank of Canada’s statement Tuesday that it won’t be changing rates until June, 2010.
If you don’t believe the bank will hold steady on its promise, you can lock into five-year, fixed-rate mortgages for as low as 3.85% on a discounted basis — the lowest rate in Canadian history.
But all of that may amount to nothing when it comes to soothing a Canadian housing market in which new construction has fallen below 200,000 on an annualized basis for the first time in seven years. March existing-home sales were off 13.7% from a year ago.
“What is 25 basis points among friends? It’s really nothing,” said Benjamin Tal, senior economist with CIBC World Markets. “This is not something that is going to change the course of the market. It only helps at the margin.”
Mr. Tal did say mortgage refinancing have risen dramatically in the past few months as Canadians who might have borrowed at 5.75% just over two years ago are ready to eat any interest rate penalty because a five-year rate mortgage is now so low.
The penalty to break an existing mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.
Mr. Tal says while there is not much lower for variable-rate mortgages to go, the gap between short-term money and long-term money is still significant enough that the temptation is not to lock in.
“You might do better the first two years [of a five-year mortgage] but not the remaining three. I’m convinced long-term interest rates will rise. I can see [long-term] rising 200 basis points. These are emergency rates and at some point this emergency will end,” says the economist.
John Turner, the director of mortgages at the Bank of Montreal says he’s never seen anything like what is going on in today’s market.
“There is a possibility of another drop,” says Mr. Turner. “But does your tummy feel good about something that has a higher possibility of going up than going down any further.”
Garry Marr, Financial Post Published: Tuesday, April 21, 2009
http://www.financialpost.com/news-sectors/story.html?id=1519667
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