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Maybe you shouldn’t lock in your mortgage rate just yet


  Jan 25, 2012 – 4:50 PM ET | Last Updated: Jan 25, 2012 7:12 PM ET

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Getty Images

It’s never looked more attractive to lock in your mortgage rate for five years but news the U.S. Federal Reserve won’t be hiking rates until the end of 2014 should make you think twice.

Bank of Montreal stunned the Canadian mortgage world with its 2.99% rate on a five-year fixed rate mortgage, the lowest in Canadian history for that term.

The deal, which ends on Jan. 25, had a number of catches — among them a 25-year amortization and prepayment terms of only 10% of the mortgage per year. Nevertheless, the move pushed a number of banks to lower their rates.

With long-term rates this low, it has almost made no sense to go variable and float with prime. The prime rate at most financial institutions is 3% with the discount for variable only 20 basis points — a thin savings for not locking in.

But Rob McLister, editor of Canadian Mortgage Trends, wonders whether yesterday’s announcement by The Fed is a strong signal that short-term rates are not going anywhere which makes locking in less attractive.

He’s suggesting an interesting strategy of locking in for one year at a fixed rate now available for as low as 2.49%. He says the commitment is really only for eight months because consumers can go to most banks and be preapproved for a mortgage and hold a rate for 120 days.

“People who were thinking about a fixed or variable have maybe another option, the one year,” says Mr. McLister, adding he can’t remember the last time he sold a variable rate product.

Eight months out he says the variable rate discounts might come back as Europe calms down, making them a more attractive option given the commitment of the U.S. Federal Reserve which should influence any move by the Bank of Canada to raise rates and ultimately impact the prime lending rate at most banks.

“I don’t think the situation has changed much but we know the Fed see rates not going up significantly  for another three years and that should give people a little more confidence to look at a one-year term,” said Mr. McLister.  

He doesn’t think there is much more room for the five-year fixed rate mortgage to go down with 2.85% the bottom based on lenders wanting a 150 basis point profit.

Posted in: Mortgages, Personal Finance, Real Estate  Tags: , , , , , ,


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