Does a lower prime rate change anything for you?
Does a lower prime rate change anything for you?
On Tuesday the Bank of Canada met and lowered the target for the overnight lending rate by 0.25% to 0.25%. Full press release from Bank of Canada is here.
For all those currently on variable rate mortgages this is likely good news. One will either enjoy the lower monthly payment or take the opportunity to reduce their principal more quickly by leaving their payment amount as is (contact me if either of these are unclear).
However, this slight reduction was not a huge surprise and we knew that the overnight rate and thus likely Bank’s prime rate would remain low likely for the remainder of 2009 and into 2010. What I found more interesting though is the comment that the Bank of Canada will likely keep the overnight rate at this level (0.25%) until the second quarter of 2010, conditional on the outlook for inflation. This is a bit farther out than I had expected as I was thinking the overnight rate and bank’s prime would have started to rise already by then. Either way, as more information is released on how the economy is doing and as more information can be confirmed with increased confidence, we can expect to be better able to predict where the road ahead takes us in terms of interest rates.
Given this information and assuming it will play out this way, would or should it affect one’s decision now whether to take a fixed or variable rate mortgage?
My answer to this is “no”. I am of the mindset that the past is not the best indicator of where the future will take us (as in investing). So despite that the variable has outperformed the fixed rate mortgages over the past 50 or so years, it is the past. Over the past year the variable lending environment has changed and we have been in Prime “+” scenario for a 5 year variable rate mortgage. The spread between a current 5 year variable and a 5 year fixed rate mortgage is not much and it would not take too many meetings for the Bank of Canada to erase any current savings that we currently have if they are to raise the overnight rate. These factors, combined with just how low current fixed rates are, it seems hard to argue against not taking the sure thing for the next 5 years given that the rate is so attractive. The 10 year fixed rate is even quite low from a historical perspective and if I could say with confidence that I was likely NOT going to have any major life changes in the next 10 years I may even consider this product. However, that is not my current expectation so I still like the 5 year term for myself anyway.
To further discuss fixed and variable rates and/or to see which is going to best serve you moving forward, feel free to contact me at anytime.
(604) 603-2520 / Maury@MauryLum.com / www. MauryLum.com /
