Floating rate mortgages tempting consumers
Posted on Mar 5, 2014 in Mortgage Market Updates and NewsBY GARRY MARR
The StarPhoenix, FINANCIAL POST
Consumers facing record housing prices are probably increasingly tempted to go with a floating rate mortgage despite all the risks that come with an interest rate linked to prime.
The lure is right in your face on every mortgage rate comparison site. The fiveyear fixed-rate mortgage has dropped as low as 3.09% with discounters, and the major banks aren't too far offthat rate, most of them offering special deals. All this comes as yields in the bond market have dropped, sending fixed rates down.
Floating rate mortgages are as low as 2.35% with the discount offthe prime lending rate 65 basis points. Better yet, it has never been easier to get a variable rate mortgage since the government changed the rules in April 2010 so that anyone applying for a variable rate must qualify based on the five-year posted rate.
The qualifying rate is based on an average of the six big banks' posted rate for a five-year closed mortgage. Declining bond yields have lowered that qualifying rate to 4.99%.
The decline may not sound like much but Rob McLister, editor of Canadian Mortgage Trends, says it means a consumer with a $300,000 home and 5% down needs 2% less income than they did just a few months ago.
Ottawa changed the rules about four years ago to tilt the playing field in favour of locking in your mortgage. When you lock in your mortgage for a term of five years or longer, you are able to use the rate on your contract for determining how much you can borrow. Go variable and you must use qualifying rate which is still almost 50% higher.
"There has been talk of changing it, speculation that the [Office of the Superintendent of Financial Institutions] will mandate the banks use the qualifying rate for five years terms and longer," said Mr. McLister, noting nothing has happened yet.
The federal government tends to like the idea of consumers locking in their mortgages because it offers protection from a sudden jolt in the prime rate - even as the Bank of Canada looks poised to go a record five years without moving its overnight lending rate.
Consumers are probably lured more by deals than anything else and the past year saw well-advertised rate wars over five-year fixed rate mortgages with the rate dropping to 2.99% for the term.
The Canadian Association of Accredited Mortgage Professionals said in a recent study that 82% of purchasers in 2013 went with a fixed rate product. The tide clearly turned last year because CAAMP says 67% of consumers with a mortgage are in fixed. The percentages are climbing for locking in.
Mr. McLister says the general rule is when the gap between the five-year fixed and variables reaches 100 basis points or one percentage point, people start to shift to a floating rate.
"You're talking about somebody who lent money at 21%," said Laura Parsons, a Calgary-based mortgage specialist with Bank of Montreal, about the difference in rates. "We don't know what a good interest rate is anymore, we really don't."