Kelowna Real Estate information by Dave Beeson

More Canadians will turn to fixed mortgages as rates plummet to rock bottom.

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Ross Marowits, THE CANADIAN PRESS

March 10, 2009

MONTREAL - Bargain basement borrowing costs are prompting many Canadians to opt for fixed mortgages even though variable products continue to be a money-winning option for the foreseeable future, industry observers say.

Canadian Imperial Bank of Commerce's chief economist says variable rate mortgages should produce the greater benefit for the next two to 2.5 years, but be a wash over five years.

"If you're really risk-averse, jump on those fixed-term rates because they're extremely cheap," Benjamin Tal said in an interview.

"Going variable probably will give you good performance for the next two years or so and beyond that, we might see interest rates rising."

Inflation could ultimately lead to higher interest rates, but likely not before 2011, he said.

Variable rates remain attractive even though banks last fall eliminated discounts and began charging premiums for those who signed up for them after the Bank of Canada lowered its interest rate.

The central bank went even further on Tuesday, cutting its trend-setting overnight rate another a half percentage point to 0.5 per cent. Banks followed by lowering their prime rate to 2.50 per cent.

Bank governor Mark Carney said he now sees recovery coming later than it had projected, possibly in early 2010. And he hinted that instead of further lowering rates, the central bank may consider alternative strategies, including buying back government bonds and other forms of credit from chartered banks.

Homeowners with variable rates, especially those with discounts reaching 90 basis points, should ignore temptations to lock in now, says Vince Gaetano, vice-president of Monstermortgage.ca.

The self-professed fan of variable mortgages said they give customers control, which is important in the current economic climate.

Gaetano said homeowners should use this window of low rates to pay down their mortgages as quickly as possible.

"The key is if you can pay your mortgage in half by the time your variable rate doubles your interest cost is going to be the same on your balance."

He accused banks of scaring mortgage holders last fall to lock in their variable rates by suggesting rates will rise. The deteriorating economy has only caused rates to fall even further.

"There's lots of consumers not happy with their banks right now for bad advice," he said, noting that people who opt for variable mortgages have to be comfortable with fluctuations.

Published Friday, March 13, 2009 11:39 AM by David Beeson