The interest rate gap

The day after the bank rate was reset last week, there was a paragraph in the Globe and Mail's story that jumped off the page at me. "For consumers, the most tangible result is fixed-rate mortgages are not dropping as fast as central bank rates. Mortgage broker ... reckons he will be able to find a variable-rate mortgage at about 4.75 per cent compared with a fixed-rate five-year mortgage of about 5.84 per cent. The spread, now almost a full percentage point, used to be only a quarter or a half point." (The original article is at http://www.theglobeandmail.com/servlet/story/LAC.20080305.RATES05/TPStory/?query=bank+rate+AND+mortgage)

Why should you as a home-owner subsidize the losses the banks have taken due to the credit crisis south of the border. The spread, when it was a quarter point probably made a variable rate a better deal for many people; at 1.09 points (using the numbers in the newspaper story; 'your mileage may vary,' since the rate for either a variable or fixed mortgage will depend upon your credit rating, etc.), why would people go for the fixed rate?

Just wondering.

(Oh, and if you have the chance, check out http://www.RussSkinnerFinancing.com

Strategies if you have a variable rate mortgage

A number of months ago, a friend was undecided as to whether to go fixed or variable on the mortgage on the new house he was buying. Most of the homeowners he knew were advising him to go fixed, so he really paid attention when I suggested that he go variable. (And this was advice friend to friend -- he had already arranged to place his mortgage through his bank, and I was just giving advice, not acting as a mortgage agent here.)

As the rates changed a few times in the intermittent months, he had second thoughts, but did go ahead with the variable rate option. When the bank rate went down half-a-percentage point last week, he said excitedly, "Should I fix my rate now?" I said that the experts were predicting a further decline, of at least 25 basis point (another quarter of a percentage point) decline in the bank rate the next time it is re-set, April 22nd.

What will I suggest to him (and clients) who approach me at that time for advice. First I will point out how much of his principal he has been able to pay by having had a variable rate mortgage up to now. If he wants to convert, I will suggest that he leave the payment where it has been (typically, a variable rate payment is set at the 5-year fixed rate). The reason for this is that if he has been comfortable with that payment, he might as well keep paying the extra every month, without affecting his prepayment privileges.

What is right for you might very well be different. (Switch to commercial mode:) That's why you should consult a mortgage professional to look at your circumstances. (End of commercial mode.)

If you have any questions about this, let me know.

Russ Skinner
http://www.RussSkinnerFinancing.com/