Improving economy could signal time to move from variable rate.
Toronto- Longer term fixed mortgage rates may soon be a better deal than variable rates for home buyers, says a new report by BMO Capital Markets.
BMO chief economist Douglas Porter and senior economist Benjamin Reitzes say that historically, choosing a variable mortgage rate has been more “cost-effective” than locking in on a five-year fixed rate, but this may no longer be the case as signs of an improving economy continue.
It has been long anticipated that both the Bank of Canada and the U.S. Federal Reserve will move to hike interest rates in 2015.
“True, it may have seemed that markets and economists have played the role of the Little Boy Who Cried Wolf on higher interest rates in recent years,” says the report release Thursday.
But there are emerging signs that the tide is finally turning for rates, especially with the U.S. economy poised to accelerate. The bond market has sent out loud warning signals over the past year that the era of low-interest rates may finally be drawing to a close.”
Currently, a five-year fixed mortgage rate from on of the big Canadian banks hovers above three per cent, with variable rates ranging below that.
As bond yields rise they will put pressure on borrowing costs and long-term mortgages, Porter and Reitzes say. “So, even if variable rates take some time to climb, we may not see such low fixed rates again any time soon.” their report says.
Most affected by potential hikes, they said, are those who are already stretched too thinly in the housing marking, so locking in at a higher rate may help this group weather any drastic increases.
“For those who don’t have much financial flexibility and would run into difficulty form a pronounced upswing in interest rates (typically first-time homebuyers), any potential extra cost for peace of mind now appears to be a price well worth paying,” the report says.
Earlier this week, the Teranet National Bank national composite price index found that home prices are rising steadily.
In February, Canadian home prices rose 0.3 per cent.
The index found that prices were up in all five markets surveyed in Western Canada and were down in all eastern markets except Montreal.
– Edmonton Journal – Business B3-Friday March 14, 2014 – The Canadian Press
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