April 25, 2011 § Leave a comment
There has been a lot of talk about high inflation rates lately (Bloomberg), and I think everyone is feeling the pinch. There have been questions floating around about how best to curb inflation rates, and the most common way to do so is to raise Bank of Canada’s overnight rate. This rate is most often used to curb short-term inflation, and Variable-Mortgage rates move whenever it does.
More recently the Prime lending rate – or overnight rate has been at historically low levels to stimulate the economy and encourage spending. Economists have been calling for an inevitable increase in the Prime/Overnight rate as the economy becomes more stable. There is some debate as to whether this will happen sooner than later, but for the time being the variable mortgage rates are providing consumers with considerable savings over the fixed rate.
Fixed mortgage rates are based on longer-term inflation predictions. If there is an expectation that rates should rise in the future, then the end result is higher rates for fixed-rate mortgage products.
While inflation is the key to determining interest rates in the future, there is always a difference of opinion among experts as to whether it’s about to surge upwards or remain the same for a long period of time.
What we’re seeing reflected today is speculation that inflation will continue to raise, hence a recent increase in the fixed mortgage rates. Currently, there is a 2% disparity between fixed rates (4.24% – 5 year average) and the variable rate (2.25% – 5 year average). This spread means considerable savings for variable-rate mortgage holders that are able to stomach the prospect of market volatility.
We don’t like to give one-size-fits-all advice, because everything to do with personal finance and mortgage solutions is subjective. What we will suggest is taking advantage of the low variable rates by increasing your mortgage payments so that your principal is getting paid down as quickly as possible. This way, when rates do rise you have already adjusted to the higher payment amount, and you have also built up a considerable amount of equity for that inflationary day!
Hopefully you learned a thing or two. If you would like a more in depth review visit the Move Smartly Blog for the original Post.