Variable Rate or Fixed? Canadians Unsure

THURSDAY, 02 JUNE 2011

After another reprieve from the Bank of Canada for an interest rate rise, there is much talk amongst Canadians about whether or not variable rate or fixed rate mortgages are the way to go.

Highlights from the survey include: 39% of respondents said they would choose a fixed mortgage if they had to choose between a fixed or variable mortgage today; 32% said they would go with a fixed rate; 25% said that they could not choose between the two.So, there is no clear-cut strategy favoured here.Also the survey showed that 61% of respondents believe interest rates will be up this time next year, while 24% believe that rates will hold their own throughout the next year. A mere 3% believe that rates will actually go down through the next year.

"The divergent opinions on whether to go fixed or variable underscores what our advisors see everyday in their meetings with clients - choosing the right mortgage depends on your personal financial situation, and there's no single answer for everyone," commented Colette Delaney, Senior Vice President, Mortgages, Lending & Insurance, CIBC Retail Markets.

There are other factors at play than just the directional predictions for interest rates, as Delaney reminds mortgage holders. "You need to approach the fixed versus variable decision from the inside out, starting with your personal financial goals and working from there," added Ms. Delaney. "Your mortgage is a major part of your overall financial plan, and your decisions should be based on how your mortgage fits with your long term financial goals, not on short term rate fluctuations."

Interestingly, the type of rate that you choose seems to have a lot to do with the stage of life that you are in, according to the CIBC poll.  27% of 25-34 year olds (who are also mostly first time home buyers or relatively new homeowners) would choose a variable rate mortgage; 42% among respondents 45-54 years of age, would choose a variable rate and who incidentally “are more likely to be near the end of their mortgage and have greater tolerance for rate changes within their mortgage payment.”

Ms. Delaney noted that homeowners can look at both a fixed and variable strategy over the life of their mortgage. "For most people, your mortgage is a long term proposition, so your strategy should look beyond your first term," commented Ms. Delaney.  "You may choose to start with a fixed mortgage when you buy your first home, then transition to a variable mortgage in later terms when you have improved your financial situation and paid down some of the principal."

What do you advise your clients when they ask this question?

Bank of Canada Holds Rates, Again

TUESDAY, 31 MAY 2011

Haven’t we seen you somewhere before?

The fact that there were nothing new in this morning's Bank of Canada’s interest rate announcement comes as no big surprise.

 Widely predicted by economists, forecasters, banks and average people nationwide, Mark Carney held the rate again.  The BOC has maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

A softening economy both south of the border, and globally, with the addition disconcertion of a full blown financial crisis simmering in Europe was enough  encouragement for Carney to hold steady.

Although commodity prices have slid somewhat recently, they are expected to remain high over the coming months, because of strong global demand, in particular from emerging markets.

The Bank of Canada predicts too, that inflation will stay higher than the optimum 2%: “While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.”

Although some experts predict that a rate hike could take place over the summer, the vast majority of those in the know pick September as the likely month for the next rate hike to take place.  If that is the case, it will have been a full calendar year since the last rate hike- which took place in September 2010.

There is no question that a continued rate hold is promising news for the housing market- as prospective homebuyers may view this latest move as a temporary reprieve- and move towards action more readily- sensing that this is indeed a time limited offer.

There are concerns though, among many analysts, that affordability is an increasing concern in many regions across the country- and that the combination of rising property prices and higher interest rates may be enough to push home ownership out of reach for some- or land those home owners that are on the fringe in hot water.

There is a sense of ebb and flow in relation to the housing market, and the Canadian economy in general though, suggests the BOC: “The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

For now though, it is business as usual. 

CMHC Predicts Return to Stability

TUESDAY, 31 MAY 2011

CMHC predicts that the housing market will stabilize in 2011, and that housing starts are expected to keep reflective of ‘demographic fundamentals’ through 2011-2012.“Modest economic growth, in conjunction with relatively low mortgage rates, will continue to support demand for new homes in 2011 and 2012. Nonetheless, we are expecting new and existing housing markets to fall in line with demographic fundamentals, as changes to mortgage rules take hold,” said Bob Dugan, Chief Economist for CMHC.

Housing starts are forecast to be in the area of 166,600 to 192,200 units in 2011, with a point forecast of 179,500 units. In 2012, housing starts are expected to be in the range of 163,200 to 207,500 units, with a point forecast of 185,300 units.

CMHC predicts that existing home sales will be between 429,500 to 480,000 units in 2011, with a point forecast of 452,100 units. In 2012, MLS sales will move up and are expected to be in the range of 410,000 to 511,900 units, with a point forecast of 461,300 units.

The average MLS price nationally has been propped up by a buoyant property market in regions like Vancouver, where a run on luxury housing and an influx of foreign property investors has contributed to significant price appreciations.

There is expectation though, as 2011 unfolds, that MLS prices will begin to fall in line closer to stable expectations.  That said, there is still an expectation that the average MLS price will increase through 2011.  In 2012, they expect that the market will shift towards stability and more balanced conditions, and that price growth- while still forecast, it expected to be much more moderate.

The report says, “We expect the average MLS® price to be between $347,700 and $374,300 in 2011 and between $349,500 and $385,000 in 2012. CMHC’s point forecast for the average MLS® price is expected to move up to $361,100 in 2011, while 2012 will see a further increase to $364,200.”

Looking at different regions, CMHC expects that BC will see the smallest declines in housing starts. In 2012, they predict that the greatest increase will be in BC and in Alberta. Ontario also will see a slight decline in 2011, with positive employment and economic recovery contributing to an increase in 2012.