Toronto Real Estate

When it was time to refinance our mortage a few years ago, I happened to meet Alexandra Smith of Scotiabank. She and her husband were shopping for a home and during the course of the conversation I discovered that Alexandra is a financial planner for Scotiabank. Now if you want some sound advice about what to do with your money – this is the lady to speak to. She is cautious, prudent and has a lot of experience. Don’t be fooled by her youth!

During the decision making process, she stated that historically speaking, you always saved on interest if you got a variable rate mortgage. SOLD!  And since, then I have had an open variable rate mortgage.

But sometimes I get the urge to lock in and guarantee my rate, especially in this day and age when interest rates are so low. Good idea or not? What you really need to understand is what determines variable rates and what determines fixed rates.

On Tuesday (March 3, 2009), the Bank of Canada  will be announcing their intention with prime lending rate. Everyone is anticipating a further cut. This is good if you have a variable rate mortgage as the interest rate is tied directly to the Bank of Canada rate. 

But – if you have a fixed rate mortgage or are thinking of locking in, fixed rates are a different story.  Fixed rates are driven by bond yields (usually, that is—but in the last few quarters have been atypical).  The Bank of Canada has no direct control over bond yields, although it can influence them in certain ways.

The fact that bonds are independent from the Bank of Canada is something many don’t grasp.  For example, the entire country might expect the Bank of Canada to cut rates 1/4% on March 3, but if stronger-than-expected economic reports precede the BoC announcement, bond yields could jump.  In that case, fixed mortgage rates could increase while variable rates fall. But this is just speculation. We have to wait until Tuesday to see what really is going to happen.

In the end, it’s just a gamble. You have to decide what you are comfortable with knowing that down the road, if rates go lower – wishful thinking – that to get the lower rate you would have to pay a penalty and who’s making money then?

If you would like more information about mortages, contact:

Alexandra Smith – Scotiabank

416-701-7271

If you would like her email address, please post a comment and I will forward to you privately