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."