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More Canadians Adopt a Low Rate Mindset

Low-mortgage-ratesFewer people are buying into the premise that mortgage rates could rise this year.

Almost half (46%) of Canadians believe that today’s record-low rates will stick around for at least one more year. That’s almost double the 24% who, in 2011, said the same thing. (This data comes from a new CIBC survey released today.)

These findings raise some interesting questions, not the least of which being: are Canadians’ rate expectations even relevant to the mortgage selection process?

In other words, if an individual now expects extended low rates, should that be a factor when he/she chooses a term?

Colette-Delaney-CIBC“The short answer is no,” says Colette Delaney, Executive Vice President of Mortgage, Lending, Insurance and Deposit Products, CIBC.

“Rate is certainly a factor in the decision, but trying to predict rates as part of a decision to choose the best mortgage for you is not advisable,” she adds.

Rates have a long track record of defying expectations. Delaney says it’s more important to pick a term that matches your financial circumstances and plans.

One’s choice of term should thus be geared to things like:

  • Your ability to absorb higher rates (and payments)
  • The time you expect to hold your mortgage
  • Job stability
  • Ability to prove income (an issue for some self-employed borrowers with mortgages that are coming due in a tighter lending environment)
  • And so on…

CIBC recommends that borrowers consider setting their mortgage payment “at the amount it would be if rates were 1-2% higher.”

For example, on a standard $200,000 mortgage, a payment set at 4.99% instead of 2.99% would cost $217 more per month but save almost $1,000 of interest over five years. (Note: This 4.99% rate is solely used to calculate the payment. The actual interest is charged at 2.99%. The advisability of this tactic depends on whether you have a better use for your monthly cash flow.)

“Not only does this (strategy) help to reduce the principal amount owing,” says CIBC, “but it also prepares Canadians for future rate increases.”

Fixed-Variable-MortgagesHere are a few other tidbits from the survey:

  • If people “had to decide” on a rate today:
    • 45% would choose a fixed rate
      (versus 50% in 2012)
    • 26% would choose a variable rate
      (versus 32% in 2012)
    • The rest are primarily “uncertain,” a group that grew nine percentage points over last year (perhaps reflecting a lack of confidence in rate direction and/or in the historical research that supports variable and short-term rates)

Poll Details: These data were gathered by Harris/Decima in a sample of 1,006 Canadians between January 24-28, 2013. A sample of this size has a National margin of error of +/-3.1%, 19 times out of 20.

Rob McLister, CMT