For your information - April 2008
Another rate cut with possibly more to come!
The Bank of Canada by reducing rates is taking no chances on a recession in Canada. The slowing economy in the U.S. will most likely create drag here and these proactive rate cuts are insurance to weaken the impact. Canada is still forecasted for growth of about 1.4%; about half of what it was last year. Our domestic economy is healthy and inflation is in check, so we may see another rate cut in June when the Bank of Canada meets again. No one likes a slow economy, but at least if we are borrowing our financing is cheap. A rebound in the U.S. economy is not expected until 2010.
When the Bank of Canada reduced rates by 0.5% on Tuesday, April 22, the mortgage lenders reduced the very popular variable mortgages by the same 0.5%. Now prime is 4.75% with a typical 0.7% discount makes variable rates at 4.05% ... amazing! Even though variable rates are great now, remember that these mortgages can mean paying less interest over the life of your mortgage. An interesting article recently appeared in Advisors Edge that reviewed a recent study on variable mortgages by renowned York University finance professor Dr. Moshe Milevsky. His key findings include:
- Based on data from 1950 to 2007, the average Canadian could expect to save interest 90.1% of the time by choosing a variable-rate mortgage instead of a fixed. The average savings was $20,630 over 15 years per $100,000 borrowed.
- Variable mortgages typically let people shave over a year off their amortization.
- Despite these findings, Dr. Milevsky feels there is no "one-size-fits-all solution" to choosing a fixed or variable rate. He says the decision should be based on one's risk tolerance.
As Dr. Milevsky points out, fixed mortgages can also be a practical choice for some, although these rates have not yet changed. The Banks are enjoying considerable profit on fixed mortgages right now and are reluctant to reduce these rates any sooner than they have to. There is significant public pressure for the lenders to start reducing fixed rates so we should expect that soon. Mind you, the current 5.35% for a 5 year fixed term is historically very reasonable. Keep in mind that rate does not rule, the privileges and fine print can vary significantly among mortgages so let us help you be aware of what you are really paying.
One of the big questions is where house prices will go in the GTA. According to Canada Mortgage and Housing Corporation, home prices are expected to increase by 2.9% in 2008 compared to 6.2% in 2007. Even though our economy is slowing, migration and low financing rates are still driving demand for housing.
Despite what's happening in the U.S. the Bank of Canada is doing everything in its power to keep our economy moving forward ... so far it seems to be working and we should enjoy not a robust but a healthy 2008.
Let's make sure your family and friends are getting the right information, and are making the right decisions ... please feel free to forward my e-letters and watch for more to come!
