Mortgage rates are poised to rise
By Josh Rubin | Tue Dec 06 2011
Mortgage rates could be drifting up again soon, even if the Bank of Canada is standing pat for now, experts say.
Already over the last few months, variable-rate mortgages have started to climb, erasing much of the advantage they had over traditional fixed-rate mortgages, says Kerri-Lynn McAllister, community manager at RateHub.ca. McAllister says we can expect more of the same.
“A few months ago, there was basically a 1% spread between fixed and variable. Now it’s .2% or .3%,” said McAllister. “I don’t think they’re done. We’re still seeing banks increase their premiums.”
Part of the reason for the hike, says McAllister, is that with mortgage rates as low as they’ve been, banks have a harder time making money.
“That’s definitely a way to improve their margins,” McAllister said. “It also creates more incentive for people to move over to fixed rates. The fixed rates are definitely more profitable for them.
Even fixed rates could be in for a rise in the new year, suggests Joseph Haimowitz, principal economist at economic think tank Conference Board of Canada.
“I think they’ll probably rise slightly in anticipation of Bank of Canada hikes, especially if the Bank communicates its intentions clearly. No bank wants to lend out money at 4% today if its costs are going to be at 5% next week,” said Haimowitz.
He expects fixed mortgage rates could rise by up to .25% by mid-2012.
Tuesday, Bank of Canada governor Mark Carney announced the Bank was keeping its key overnight lending rate at 1%. That overnight lending rate affects the prime rate which banks charge their best customers. Prime rate at most banks is currently 3%.
The days of deep-discount variable rate mortgages offering rates half a per cent or more below prime are gone for now, according to Robert McLister, editor of Mortgage Rate Trends.
“Is it gone forever? I don’t think so. But it’s gone for the foreseeable future,” said McLister. He predicted variable rates could rise by as much as .2% over the next few months.
While the average posted rate for a 5-year fixed rate mortgage is 5.29%, many banks are offering fixed rates as low as 3.29%, says McLister. That compares very favourably to the average rate of 2.8% for variable rate mortgages over the same 5-year term, McLister says.
“The spread is maybe half a point. That’s a historical anomaly,” said McLister.
One contrary note came from an independent panel, which suggested that fixed rates could drop over the next month, while variable rates will stay put.
“With no quick fix on the horizon for the European debt crisis, the global economic outlook continues to be pessimistic causing downward pressure on longer-term bond yields. Couple this with decreased demand for home loans during the busy holiday season, and it is likely that fixed mortgage rates will stay low or even drop further over the next 30-45 days,” the panel said.