Blogs & Comment

Time for fixed-rate mortgages?

The Bank of Canada (BOC) raised its overnight rate today (to 1%), which increases the odds chartered banks will be raising their prime lending rates. That means variable mortgage rates should also be edging up since they are linked to those prime lending rates.
Meridian Credit Unionalso sent me a note today warning that the upward trend in variable rates is likely to continue until they are above fixed mortgage rates by the end of 2011. They conclude it is time to choose fixed-rate over variable-rate mortgages.
Right now, the credit union offers a 5-year closed fixed-rate mortgage at 3.78% while the 5-year closed variable rate is at 2.15%. However, says a spokesperson, current rate forecasts predict that the BOC prime rate will rise to 4 or 5% by the end of 2011. This could cause variable mortgage rates to increase by more than 2%.
They believe the Bank of Canada will keep raising its overnight rate to curb inflation, while yields in the bond market to which fixed-rates on mortgages are linked wont move up because you have a lot of investment going into the bond market [and this] is pushing up the demand and prices of bonds and adding to the pressure on interest rates.
My hunch is that one doesnt usually see short-term rates above long-term rates until quite late in the business cycle. This inversion normally occurs when the central bank deliberately wants to tighten and dampen an overheating economy which historically has happened at least 3 to 4 years after the last recession. The end of 2011 may be too soon for that policy decision, especially given current deleveraging headwinds.
Moreover, if short-term rates are headed up because of the BOCs desire to curb inflation, long-term interest rates on bonds should also be going up. Bond holders will be increasingly concerned about the erosion of the real value of their principal and interest payments — and thus should demand a higher premium for heightened inflation risk.
Lastly, Im not sure if one should be attempting to time mortgage rate trends as part of their mortgage choices. York University professor Moshe Milevsky did some research a while ago suggesting variable-rate mortgages are generally the best choice over the long run.
As I recall, he found that variable rates exceeded fixed rates less than 13% of the time. A caveat: that finding extrapolates from the past and we could be in ahistoric times as perhaps suggested by the scale of recent crises and leverage in the economy. So ones level of risk tolerance could also be a factor in mortgage choice as well.