Wednesday, October 1, 2008

What is your best strategy against mortgage rate increases ?

The credit crunch is hitting close to home with more moves by the big banks to increase the cost of borrowing on mortgages.

Many of the big banks and other lenders have stopped offering variable rate mortgages with a discount below the prime rate.

Up to mid-way through 2007, most lenders still offered variable rate mortgages at up to prime minus 1.00% (in today's terms 4.75% minus 1.00% = 3.75%) but recently things have been changing since we are all linked by the problems in the world financial markets.

Since roughly August 2007 (ABC paper crisis started) the discounting of rates has gradually fallen and as of September 29 this year, most lenders were only willing to offer variable rate mortgages at the prime rate ... without any discount.

Since the lenders now pay more in their overnight borrowing rate and overall cost of funds, they pass along those increased costs to their customers. Not limiting things to the variable rate mortgage customers, lenders have also set fixed mortgage rates higher than they would be under normal circumstances.

So, here's the million dollar question ... what is your best strategy as a borrower?

You can still go ahead with a variable-rate mortgage at 4.75% which is still a good rate no matter what you may think. This lower rate means saving money now (you are still lower than the fixed rate products) but means you have to pay attention - through a good mortgage professional - to what the market is doing and be able to react in case of a spike in the prime.

By the way, rumours have been circulating recently that the Bank of Canada may drop their rate by .25% this month as a boost to the marketplace and a way to instil some faith back into borrowers and lenders alike. Even if they don't, you still have 4.75% until the next meeting and are below the fixed rate prices.

My feeling is that the discounting will return at some point in the future so another strategy might be to go ahead with a short term fixed rate mortgage and wait it out, returning to the variable mortgage option in the future on your renewal date.

I don't think rates are going to go up, but many borrowers just don't want to worry about it. With this in mind, your other options include the longer term plans. Posted five-year rates at major lenders are around the 7.20% mark with some banks offering "special" discounted rates of 6.14% per cent on their websites. Remember, using a mortgage professional will get you a five-year mortgage as low as 5.39% today (rate subject to change and lender approval of course).

No matter what you decide, my advice is always the same. Trust a mortgage professional to review your situation and do the shopping around for you. Don't just settle for whatever discount your bank is willing to offer.

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