According to the central bank, while Canada’s economic recovery is under way, it is unfolding at a slower pace then previously expected.
Alongside the ever important American influence, the BoC is back on hold, with many analysts speculating it will contine to do so until the end of this year.
So what does this mean for borrowers? For the time being, the prime rate will continue on at current levels, inevitably creeping upwards sometime in the future as the world economy gains more momentum. The prime lending rate affects everything from mortgage money to lines of credit, and possibly even the interest rate paid on your credit card.
The BoC meets eight times per year to discuss their key rate, which is very important to Canadian borrowers and our national economy. At each meeting, it is determined if the key rate should be maintained or adjusted in either direction. Typically, the BoC will adjust the rate in small increments, a sort of watch-and-see approach.
Borrowers looking to arrange a mortgage can choose to be in an adjustable-rate mortgage, commonly referred to as an ARM, or a fixed-rate mortgage. The fixed-rate mortgage is determined for a set amount of time, referred to as the term of the mortgage, and that rate is guaranteed by the lender.
The adjustable-rate mortgage is tied to the prime lending rate and can fluctuate throughout the term of the mortgage. This also means that your payment will adjust, in either direction, to account for the decreasing or increasing prime rate.
The beauty of an adjustable-rate mortgage is that borrowers reserve the right to lock into a fixed-rate mortgage at any time during the term. Some borrowers will use this opportunity to sit on the sidelines, deciding when it seems best to lock in their rate, while others will ride out the ups and downs of prime over the life of their mortgage, which much data supports as often being a money-saving move.
Alternatively, if borrowers choose a fixed-rate mortgage, and later wish to rethink that decision, lenders reserve the right to charge a payout penalty to recoup interest charges that will be lost by the switch. Borrowers will need to weigh the financial pros and cons before rushing to jump ship on their fixed-rate mortgage.
Fixed mortgage rates and the prime lending rate operate independently of each other, meaning that there can be, and often is, a spread between the two rates. Since they don’t necessarily travel in the same direction, the spread can widen or lessen based on the market factors at the time, making one or the other seem more or less attractive.
Currently, lenders are offering significant prime minus discounts to eligible applicants on their adjustable mortgage products, which have come down substantially from early 2009 when many lenders had ARM pricing at prime plus 1.50 per cent, or higher. In fact, pricing is so low on this type of mortgage that we are almost back to pre-recession pricing.
— WIN a weekend getaway for two! Details at www.SharonEssington.com/Kingfisher. Sharon Essington is an Accredited Mortgage Professional with Verico Canada Mortgage Direct Ltd and can be reached at 403-239-8250.