Rates to Reverse Upward - CIBC

Mortgage rates will climb at least 1% next year if CIBC is right.

Economist Jeff Rubin expects "a material acceleration in inflation in Canada over the next 12 months."  He thinks that "should reverse the current direction in Canadian interest rates."

CIBC still feels the Bank of Canada may announce another rate cut this year, however--probably 1/4%.  That would bring the BoC's cuts to 1.75% since December 2007.  But Rubin says "markets will be surprised at how rapidly the Bank is compelled to take back those easings."

CIBC's call is a timely reminder of the obvious, that interest rates don't always go down.  With so many homeowners choosing variable-rate mortgages these days, it's important those people realize that they may be faced with a decision in 6-12 months.

As rates go up, so do variable-rate mortgage payments.  The exceptions are variable-rate payments that are fixed at closing.  Variables are great for most people, but if your budget and equity are tight, it's possible you shouldn't be in one at all.  At the very least, you should be in a variable mortgage that has fixed payments.

Of course, variable mortgage holders can always lock into a fixed rate, but there's sometimes slippage.  Slippage is when fixed rates go up before you lock them in.

Keep in mind, fixed rates can go up any time.  Sometimes your lender will telegraph their rate increases to your mortgage planner, and sometimes they won't.  In any case, lenders will sure as heck not send you an email to give you warning.

Mortgage planners can always try to watch bond yields to give you an early signal, but that's not foolproof either.  (See "Predicting Fixed Mortgage Rates.")  The best mortgage planners in this country are often no better than chance at predicting rate turns.  (That's not an insult.  Even economists who get paid a lot more then us can't do it consistently.)

Of course, in addition to slippage, there's the challenge of long-term timing.  For conversation, let assume you could in fact foresee a 1% increase.  You surely can't see what's in store after that.  What if skyrocketing commodity prices cause a global economic slowdown after you lock in for 3-5 years?  Then rates go down but you're stuck in a crusty fixed rate that's milking you for extra interest payments.  Not good.

The moral is, timing interest rates is for gamblers--the same kind of gamblers that make $400 million a year for Bellagio.  If there's any chance your budget can't tolerate a 10%+ payment increase, and you're in a variable, you might not want to wait till the last minute to convert to a fixed rate.

Every case is different, though, so talk to your mortgage planner for his or her thoughts.

Comments

[Terry]

This is our predicament…

We are set to renew in March, 2009. We have always been fixed rate people and plan to continue this but the questions is now for how long. 5 years enough? We (read: the entire planet) are headed for tougher times no doubt but can anyone provide a well founded answer as to where long term rate will be? I know, I know, it’s a guessing game but what’s your prediction? Just plain silly to even consider 10 year?

[Terry]

BTW...don't get rid of this site. I really, really, really, really, really, really, really, really, really, really, really, really, really find it useful.

Really.

[Dan]

Hi,

Interesting! We are in a similar situation with our mortgage. Just started with a variable rate (now at 4.25% with PC Financial) with a 10 year amortization. House will be paid off in less than 10 years since we are paying at an accelerated weekly rate. Question is how long are we going to wait to move to fixed rate. When we do and it may be very soon, the plan is for a 9 year term. PC Financial's current 9 year rate (without points) is 5.86%. Difference in weekly payments between variable and fixed mortgages is only about $20. This rate is even lower than the mortgage I had on my first house in 1997. Given this information and for peace of mind, I am giving serious consideration to move next week to lock in at this rate in spite of our variable rate likely dropping to 4% after the next BOC rate announcement on June 10th. Any thoughts would be appreciated.

Dan
Thunder Bay, ON.

[Canadian Mortgage]

Terry,

That's very nice of you to say. Thank you. As long as Melanie keeps letting me stay up late at night, this site will not disappear.

The big Bay Street economists predict:

* lower rates for the next few months
* a holding pattern for 1-3 quarters thereafter
* higher rates in 2009

For what it's worth, these folks have a lot more money and data behind their opinions than I. So I'll defer to their call on this one.

Farther out (a year or more) it's a total dice roll.

If you're renewing in March 2009 the rate picture might be a lot different than today. If you were locking in now I'd suggest looking at a 7 year instead of a 10. The rate premium is a lot less.

Cheers,
Rob

[Terry]

Thanks Rob. Appreciate the input.

[Ryan]

Here is my situation...

My mortgage is coming up for renewal in 4 weeks. I am currently locked into a 5 year fixed rate. I am leaning towards a variable for the remainder of the year and then looking to lock in towards the end of the year or early next. My question is, am I better off with an OPEN variable or CLOSED variable?

My concern is that if I opt for the closed variable, because the rate is a bit lower (.10%), I lose my negotiating power when it comes time to negotiate a fixed rate with the bank due to the $2500.00 penalty I would incure if I switched banks. Whereas if I go with the open variable I think I have more power because I do not face any penalty by switching and therefore should be able to negotiate a better rate when the time comes.

What are your thought on this??

Any help is greatly appreciated! :)

[Mortgage Broker]

Hi Ryan,

1/10% is a small premium to pay for an open, but if you refinance instead of convert, you might also pay legal and appraisal fees. That could be $1000 right there. Some lenders also charge $200, for example, if you break their opens in the first year.

On the other hand, the best fixed rates are at least 3/10% below the lowest conversion rates as of today (this can change at any time). If this trend continues, and your mortgage is $200,000+, you might therefore be better off refinancing an open variable instead of converting a closed variable.

But it depends on other factors as well. Any mortgage planner, ourselves included, can provide a more definitive answer if call them with details of your situation.

Good luck!
Melanie