Canadian fixed-rate mortgage prices rose last week to a whopping 7.2%. Today, calmer banks are offering fixed-rate mortgages hovering around a more reasonable 6.14%, and it is possible to get a 5-year fixed- rate with a credit union at 4.99%.
The Toronto mortgage rate hike is a response to the American mortgage crisis, which decreased the value of the Canadian financial market by almost 15% in one week – its worst performance since 1980.
Variable-rate mortgage prices followed the rise of fixed-rate mortgages this week. Ninety percent of home buyers during the housing boom took out variable-rate mortgages to circumvent the high fixed-rate.
Home buyers with less-than-perfect credit could easily obtain a variable-rate mortgage at 1% less than the prime lending rate. This week, buyers pay the prime rate, even if they have an exemplary credit record. You can obtain a 5-year open, variable rate mortgage for 4.75%, providing you have a minimum down payment of 5%. The days of no money down are over. You cannot leverage as much as you could in 2006.
Buyers must evaluate their risk tolerance with a knowledgeable mortgage broker: Do short term savings with a variable-rate quench your fear of American economics spilling over into Canada? After all, the U.S.A. is responsible for generating 25% of the world’s income.
Most home buyers are opting for the safer 5-year fixed-rate mortgage this week, even though rates are artificially high because of U.S. recession fears. If you are a first-time home buyer and do not have any risk tolerance, then a fixed-rate mortgage is probably right for you.
However, if you are an experienced home owner and can manage some degree of risk, then a variable-rate would benefit you, because it will take a few increases in the prime rate for you to be paying more than your fixed-rate counterparts. Market watchers predict interest rates will remain stable in the short term, and may even fall if there is a recession.
