I read with interest Malcolm Morrison’s article in the July issue of REM (Get ready for inevitable interest rate hikes).
Gavin Graham, vice-president and director of investments for the Guardian Group of Funds, says in the article: “Anybody who hasn’t locked in their mortgage — at least a three-year if not a five-year mortgage, at (current) 45 year lows — needs their head examined.”
The question is: if I lock in for five years now, what would the rate have to be for me to save money over the five-year period versus staying with a floating rate?
Using my mortgage calculator, I can see that on a $100,000 mortgage with a 25-year term, a floating rate at three per cent will save me $14,114 over five years, or $235 per month, when compared to a locked-in rate of 5.25 per cent.
At this point a valid question would be: by how much would the variable rate have to rise to make it worthwhile to lock in for five years? If the variable rate were to increase uniformly by 0.9 per cent per year for the next five years, one would still be slightly better off with the variable rate mortgage (assuming that half of the annual rate increase starts now). By the end of the five-year period, the variable rate mortgage will be at 7.5 per cent; and, assuming the current rate differential, the new five-year rate will be 9.75 per cent.
Mr. Graham’s comment that the overnight bank rate may be up at least one per cent by the end of next year is interesting, because based on these numbers, if the overnight rate is up by 1.35 per cent one and a half years from now (the end of next year) one would still be better off remaining with the floating rate.
My view, and I’m an ex-professional engineer, now helping people buy and sell real estate; is as follows:
Supply and demand ultimately controls all prices (including the price of money). Canadian governments, for the most part, have reigned in their deficit budgets. The baby boomers have bought their houses. Unless something changes in a big way, I am not sure what the drivers will be to push five-year rates so that they will approach 10 per cent five years from now, which is what they would have to be to make a locked-in five-year term today worthwhile. One of the bigger unknowns, perhaps, is what will happen on the international scene, and that is almost impossible to predict.
Paul J. Thomas, B.Sc., Realtor
Sutton Group – Canwest
Calgary
