Is now a good time to go variable???
Variable rate mortgages are at the lowest rates in history at the moment and those of you that took a variable rate over a year ago and received a discount to prime are currently paying a little over 1% interest on your mortgage. However, those of you that are looking at getting a variable rate mortgage today are looking at paying a premium on top of the prime rate (anywhere from 30 to 60 basis points). Even with the premium today you are still paying a very attractive interest rate on your mortgage, but what happens when interest rates begin climbing. The Bank of Canada and the Fed in the US both plan on keeping lending rates low well into 2010 to ensure a steady and full recovery, but after that they will begin raising rates in an effort to control the inflation that goes along with any financial recovery. Keep in mind we have seen prime rates of 4.5% to 5% in the last couple of years and it would not be surprising to see them again…..or even higher.
So, are we going to see large discounts to prime again in the near future? I don’t like saying never, but probably not. It is realistic to think we will once again see variable rate mortgages at prime or even prime less 20 or 30? I think this is a definite possibility. In fact many industry experts predict we will see this happen in the next 6 months.
How does this help you if you need a mortgage today? Well, I recommend to most of my clients to take a shorter term mortgage (1 or 2 years) and wait until variable mortgages are once again priced at prime less a discount. Not only can you take advantage of great short term rates today (2.75% for a 1 year), but when you do get your variable mortgage it will most likely have a discount to prime which will help protect you even when the prime rate increases.
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