Should you be locking in your mortgage?

It’s no secret rates are going to rise this year, the question is how much and how fast?  Some sources say rates are going to rise .50% at every meeting until mid 2011, and there are few articles contesting that.  The question is will they wait until their set date to keep rates low?  Most are betting yes.  But what does that mean for mortgage holders?  Should they wait until June to lock in?  How exactly does the Central Bank rate affect the fixed mortgage you lock in to?

5-year mortgage rates aren’t directly influenced by the Central Bank Rate.  It’s automatically assumed that when the Bank of Canada (herein referred to as BoC) raises their rates a quarter point, the new 5-year mortgage will go up by the same.  This isn’t the case.  What affects your 5-year mortgage is actually investors in the market. They try to measure the market and predict what they think rates will be over a 5 year period.  The banks will then buy money at that price and lend it out to you as a 5-year mortgage.  They usually look for a spread of anywhere from 1.4% to 1.8%, depending on the lender.  They need to make money too you know!  If investors think rates are going to go up, this is reflected in the bond rate (which you can see HERE), which dictates what the lenders will be offering on their mortgages.  Today’s Bond rate closed at 2.5%, which is inline with lender’s 5-year rates of about 4%, giving them a 1.5 point spread.

Variables are much the same.  Today’s central bank rate is .25%, which means qualified lenders borrow money at that rate and lend it to consumers.  This is usually translated to consumers as the “prime rate”.  The prime rate typically has the same spreads as the bonds and currently stands at 2.25% giving a spread of 2 points.  Depending on the products/qualifications, borrowers can borrow money at either a bit higher or lower than the prime rate.

So what does this mean to you?  It means that rates can move at any time and there isn’t any set formula for what you should do.  It’s not black and white.  While BoC has their set dates for setting monetary policy, the market doesn’t, and the spreads which the banks need can change daily.  For example, the overnight rate today is at .25%, in July 2007 this same rate was 4.5%.  That doesn’t automatically mean that mortgages were 4% higher.  5 year mortgages were still under 6% and variables were in the low 5% range.  Even the bond rate spread can change.  Taking  a look at this graph you can see the huge difference in bond rates from a year ago.  And yet we’re still at the same rates with the lenders.  Tolerances change with the times and the anxiety of the market.

Canada 5-year Bond

So while this may not have answered the million dollar question as to whether you should wait to lock in your mortgage, or jump on the wagon now, it should give you more insight into what REALLY drives the wheels behind rates.  What’s important is to find knowledgeable professionals that can keep you apprised of the situations that affect your mortgage and listen to their advice.

If you have any questions, please don’t hesitate to call or email us.  Our contact details can be found on our website.  We’d be happy to chat with you regarding questions you have about Mortgages and Interest Rates.

Alta Pacific Mortgages

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By Scott Hiebert