Homeowners should try to stick with variable mortgages

By Romina Maurino, THE CANADIAN PRESS 2008-06-19 16:05:00

TORONTO - Homeowners looking to renew their mortgages should resist the urge to lock in to the safety of a fixed-term mortgage in the face of rising rates if they can stomach the more nerve-wracking ride of a variable mortgage, experts say.

The prospect of a mortgage that rises and falls with prime rate changes may cause some unease - especially following last week's announcement by the Bank of Canada not to cut interest rates and the subsequent hike in mortgage rates by several of the country's biggest banks.

But experts say they may still be worth the trouble because they will save more in the long run.

"Right now, if it was me that had the variable, I'd be sticking with it because I'd look and say that even with that increase that's expected to happen, (you'd save) money over that net period of time," said Mark Olkowski, regional manager at Invis, one of Canada's largest mortgage brokers.

"Taking the fixed term, paying the premium to actually have it locked in so they can sleep at night may not be worth it in the long run."

Many people who opt for fixed mortgages do so for the security they provide - they like knowing what their payments will be every month, and may be spread too thin financially to afford much more.

But variable mortgages often offer more flexibility, and have more pre-payment options for those wishing to pay their mortgages off faster.

"If it becomes important to pay off the mortgage faster, they can lose a little bit of those pre-payment options if they do fix in for a longer period of time," Olkowski said, noting that a fixed mortgage may allow for a 15 per cent pre-payment option, while variables are usually around 20 per cent or higher.

If the fluctuation of a variable becomes too much, there's also usually the option to lock in at any time.

"Studies have shown that in general, the variable rate will cost you less, but there may be times, if rates go up fairly quickly for example, that you're going to be kicking yourself for not having locked-in," said Adrian Mastracci, president of KCM Wealth Management in Vancouver.

"You can never be 100 per cent sure. All you can say is: 'What's more important to me?"'

Mastracci suggests assessing the risk of your budget and income to help you decide which kind of mortgage to pick.

"If you can't stand the risk of something going haywire, you may want a fixed rate," he said.

"If you have enough wiggle room in the budget, the variable rate may less than the other rate, but you just have to be able to stand the risk of that prime rate going up, which it may well do."

And while Olkowski notes that most economists are expecting prime to go up over the next 12 to 18 months, he warns against basing too much of your decision on where interest rates may go in the future.

"It's stunning how many things can actually affect interest rates and where they can go," he said, noting even expert predictions are often wrong.

"Even looking at the Bank of Canada and their decision to change rates seemed to be based on one particular item that they found particularly important that month, and then the next month it's no longer gross domestic product, it's now foreign currency or unemployment figures."

Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group, says individuals have to think of mortgages in broader terms than just a focus on where rates are at on any given day.

"If you're renewing your mortgage, you should keep in mind are you planning renovations in the future, are you considering a move?," he said.

"If you are renovating, you have the ability to blend and extend interest rates with a longer-term mortgage so it may be advantageous to lock in a good rate today, carry that forward."

"If you're moving to another property, most lenders will provide some portability feature where you can bring the mortgage with you and carry one with the good rate and terms that you have, and top up for your particular needs with the new property."

But above all, Mastracci said, borrowers should focus on getting a mortgage that can be paid off as quickly as possible.

"You may be able to take a fixed-rate and still have a pre-payment privilege, which is really the biggest thing that you have to do with a mortgage," he said.

"Some people are taking the 40-year amortization, or 35 or 30 - that's not taking a mortgage, that's long-term leasing."

Here are some other tips from Mastracci about assessing your choice of mortgages:

- Check your credit score: A high check credit rating may help you negotiate a better interest rate.

-Know what your particular institution is doing in terms of rates and what the competition is doing.

-If looking at a variable mortgage, find out when you can lock in the rate if you chose to and what fees apply.

-Keep in mind that home or condo mortgages aren't tax deductible.

"Even though the rate might be five or six per cent on the face of the mortgage, the cost to you is that you have to earn the income, pay tax on it, then have the money for the mortgage," Mastracci said. "The before-tax real cost might be eight, nine per cent, very easily."

Oil and financials could weigh on TSX this week as Fed mulls interest rates

By Malcolm Morrison, The Canadian Press

TORONTO - Gains could be tough to find on the Toronto stock market this week as investors wonder how much further the oil sector can carry the TSX, while financial shares fight fresh headwinds.

Concerns around those two areas again stopped the Toronto market's main index from establishing itself above the 15,000 mark last week.

On Monday, traders will be looking for the market's reaction to the Supreme Court's decision to allow the takeover of BCE Inc. to go ahead and a statement by the banks financing the deal that they "expect that the transaction will close in accordance with the definitive agreement between BCE and the sponsors."

Shares of BCE have traded well below the $42.75 per share price offered by the group led by the Ontario Teachers' Pension Plan in recent weeks.

But investors will likely want to hold off on any big bets on the market ahead of the announcement on interest rates from the U.S. Federal Reserve on Wednesday.

"It's a Fed week," observed Michael Gregory, senior economist at BMO Capital Markets, adding that most analysts expect the U.S. central bank to leave its key interest rate unchanged at a four-year low of two per cent.

"I think they're very much on hold for awhile until they see how things pan out," Gregory said.

"I think they essentially indicated that (last) week with various Fed officials giving a sense that the market was getting way too ahead of itself in factoring in tightening."

But economists think there isn't much doubt that the Fed and other central banks will have to move rates upward sooner or later to prevent inflation from taking hold as near-record oil prices threaten to ripple through the economy.

"You talk about 2009, of course I think that's well within the cards," said Gregory.

Last week, the TSX composite index hit a record close of 15,073.13 before China moved to restrain fuel consumption by raising government-controlled prices and the energy sector stalled.

The index ended the week down 1.3 per cent, led by falling energy and financials.

The move by the Chinese government sent a chill through the Toronto market, where the oil sector has been largely responsible for the index's six per cent year-to-date gain.

The sector has surged 27 per cent so far this, but oil prices have been volatile.

"The fundamentals have put the market in such a position that even little things like (the Chinese announcement) cause huge price swings," said Gregory.

"We're at the point now where commodity price volatility has increased and will likely remain high going forward."

Meanwhile, the financial sector ended lower on a run of bad news at the end of the week.

This included a decision by Moody's Investors Service to downgrade the two biggest bond insurers, MBIA Inc. and Ambac Financial Group Inc., which underscored U.S. money-centre problems and heightened fears of bond-market instability.

And Citibank warned of more writedowns.

"I think there's more (bad news) out there somewhere," said Gregory, noting that investors remain cautious about banks and other financial service providers, especially in the United States.

"Yes these stocks are cheap but maybe there's a reason why they're cheap."

Mortgage Rate may be at the lowest point

The bond market took a beating yesterday as inflation fears sparked concerns of a rate rise. 5 year bonds moved up 23 bps to 3.52%, this has compressed spreads significantly and could result in fixed rates moving up. This could be the low point for fixed rates in the short term…

Bank of Canada keeps overnight rate target at 3 per cent

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.

Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside. Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected. At the same time, many of the downside risks to inflation identified in the April MPR have eased, while the evolution of credit conditions has been in line with expectations. The risk remains that potential growth will be weaker than assumed.

With the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply, which is expected to increase this year. Consistent with the April MPR, the Bank continues to project that economic growth will pick up this year and accelerate in 2009, owing in part to a firming of U.S. demand and accommodative monetary policy in Canada.

If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.

Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely.

Information note:

The Bank of Canada's next scheduled date for announcing the overnight rate target is 15 July 2008. The Bank will publish an updated projection for the economy and inflation, and its assessment of the risks, in the Monetary Policy Report Update on 17 July 2008.

Bank of Canada to cut rates again

June 10, 2008 Julian Beltrame The Canadian Press

Bank of Canada governor Mark Carney had an easy decision to make yesterday. Facing a stumbling economy and possibly the world's most dormant inflation picture, the rookie central banker will trim interest rates 25 basis points and hope for the best.

It's a no brainer, say most economists, with 12 out of 12 agreeing in one survey.

The central bank's continued easing stance will take its key overnight rate to 2.75 per cent which, combined with the U.S. Federal Reserve's hint that it is through cutting its equivalent rate for now, has put downward pressure on the Canadian loonie.

The dollar slid below 98 cents US yesterday to close at 97.89 cents.

But while today's action appears a foregone conclusion, Carney's job is about to get significantly more complicated going forward, say economists, because no one knows to any degree of certainty what will happen next to the U.S. and Canadian economies.

"There's uncertainty with respect to the prospects of the U.S. economy.

"There is uncertainty about how credit markets will evolve, then you have oil,'' said TD Bank deputy chief economist Craig Alexander.

"The forecasts for oil range anywhere from $70 to $150 by the end of this year and from a point of view of the Canadian economy, boy does this have significant impact in terms of national income, inflation and relative economic performance.''

The TD Bank is one of the few forecasting institutions that believes Carney will go to the sidelines only briefly after Tuesday, then begin cutting again in the fall.

That's because, says Alexander, he believes the Canadian economy will continue to struggle for the remainder of the year, and that next year's recovery will be weaker than most assume.

The economy had a surprisingly weak first quarter, with a 0.3 per cent contraction that was well below the central bank's prediction of a one per cent advance. And with Canadian inflation still running below the central bank's target of two per cent, nothing is holding back Carney from his third rate cut since taking over in February.

Previously, he has twice cut rates by 50 basis points at a time -- deviating from the bank's usual changes in 25-point increments.

"We're in a bit of a special situation compared to a lot of other central banks,'' said Stephen Malyon, a currency strategist with Scotia Capital, of Canada's non-existent inflation. "That won't last forever.''

What could restrain the Bank of Canada in the future is the fear of inflation returning. With prices rising at close to four per cent in the U.S., Federal Reserve chair Ben Bernanke has signalled he is through cutting for now, despite last week's employment report that showed the country losing another 49,000 net jobs.