Much has been written in the business pages of late concerning interest rates and what they will be doing in the near future. The Bank of Canada has stated that they will not increase their “prime rate” before July. This does not mean that the rate will decrease, only that there will be no increases until then.
One of the key influences on the Bank of Canada’s rate decision is the value of the Canadian dollar. The Canadian dollar has been performing well, however, our dollar’s rise is predominantly a product of the US dollar’s weakness. Our currency is closely tied to the price of commodities, particularly oil. Case in point: the price of oil popped up to $80/barrel and our dollar jumped to $0.975 US. Oil dropped to ~ $75/barrel and our dollar dropped to $0.95 US.
The Bank of Canada is stuck in a tough spot. If they increase rates to try and slow the pace of recovery or inflation, our dollar will increase in value. As our dollar increases in value, the cost of our exports increases, making us less competitive on the international market. Money markets look for a safe place to “park” money in the fear that the US greenback will fall further, with bleak economic news and a prime interest rate that is virtually giving away money for free.
So what does all of this mean for your mortgage? If you are locked-in long-term (like 5 years), you can sleep at night. If you are looking for a new mortgage, a re-mortgage or a renewal, an important change happened recently. Variable mortgages were available until 6 months ago at “prime minus”, meaning that if you had prime minus a point, your rate was as low as 1.25% - obviously extremely cheap money. The banks recently changed this and now offer only “prime plus” on variable mortgages, resulting in higher rates and as much as a 2% swing.
So today, you might be looking at 3.25% on a variable rate, but with a little shopping or with our assistance you can secure 3.9% for 5 years and 4.1% for 6 years. Now, 4%+ sounds high against 1.25%, but not bad against 3.25%.
Naturally, the first step in refinancing is to take advantage of the best rates available. There are, however, other things that can be done after you have signed your mortgage papers to reduce your cost of borrowing. Our strongest advice to our clients is to take advantage of penalty-free prepayment options. The two most popular payment options are “anniversary payments” and “double-up payment” options. Anniversary payments allow you to pay down up to 15% of your original mortgage amount at any time, once per calendar year. A key feature of this option is that the payment goes directly against the principal owing on the mortgage, greatly reducing the future interest paid. Also, most mortgages allow you to double up your monthly or bi-weekly payments as well. This second payment is also applied entirely against the principal owing and helps to reduce future interest. The impact of using these pre-payment options is that your mortgage gets paid off faster and the amount of interest you save is huge. For example, it is very common for a family to shorten the length of their amortization from 25 to 15 years simply by making use of some or all of the pre-payment options available to them.
In closing, we are committed to giving you the very best advice for your individual situation. Should you require mortgage financing advice, it would be our pleasure to help. We frequently deal with all the major lenders, and we can direct you to the best product for your needs.