Rediculously cheap mortgage rates appear to be over
Globe and Mail Update - Friday, Jun. 12, 2009 10:52AM EDT
The days of ridiculously cheap mortgage rates appear to be over. Now they're just cheap. A sudden and dramatic jump in rates from Wednesday to Thursday means Canadians looking to break their existing mortgage and refinance at a lower rate may have missed the sweetest spot in recent history. But that doesn't mean people can't still trim their payments.
Toronto Dominion Bank kicked off the hiking party, raising its five-year closed mortgages - the one of the most commonly chosen by Canadian homeowners - by a whopping 0.4 percentage points to 5.85 per cent on Wednesday. That hike, its biggest in nearly a year, is on top of a 0.2-point increase unveiled last week by TD and several other big Canadian banks. Three other big banks followed in TD's footsteps and raised their posted rates in the last twenty-four hours, and other lenders are expected to follow suit.
With interest rates floating near generational lows, Canadian home owners who locked in last week may have been fortunate enough to negotiate a fixed-rate five-year mortgage as low as 3.65 per cent. Although no one knows where interest rates are headed, the consensus is that they are unlikely to be this low again for a long time.
"These are really emergency interest rates but emergencies do not last forever," says CIBC World Market economist Benjamin Tal. "I do think that interest rates will rise, I don't think it will happen in the very near future but three, four, five months from now they will be higher. Definitely a year from now they will be higher. And in two years, they could be notably higher." The stunningly low interest rates have led many Canadians to break their existing mortgage and get in at a lower rate. Mortgage brokers say that despite the penalties associated with it, a massive chunk of their recent business has been refinancing existing mortgages. And despite the latest jump in mortgage rates, they don't expect that to change.
The decision to break an existing mortgage depends on the penalty, as well as how many years are left on the existing mortgage. It might, for instance, make more sense to break a mortgage with a year left on it as opposed to one with four years left. Penalties for breaking a mortgage loan can be either the greater of three months' interest or the difference between the interest the bank could make on your mortgage as originally arranged versus lending money out at current rates. Most recently the so-called interest rate differential, or IRD, is the larger penalty and the one many lenders use.
All of this is specific to the lender and subject to negotiation. In some cases, banks will do a blended rate, which blends the existing mortgage with the lower current rate. At the end of the day, home owners may or may not end up paying less interest than if they had stuck with their current mortgage.
Given that the Bank of Canada has said interest rates are likely to remain unchanged until the second quarter of 2010, a variable rate can provide huge savings for home owners who can stomach a little risk.
By:Roma Luciw
