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January 2006

Market commentary & Interest rate trends

The Bank of Canada (BOC) increased the overnight rate by 1/4% to 3.25% on Dec 6, 2005, prompting banks to increase the prime rate to 5%.  The 3 yr and the 5 yr term mortgages have increased as well.  Ten year mortgage rates remained unchanged during the past month.   Consequently, the gap between the 5 year and 10 year mortgages has narrowed.

Economists are predicting another quarter point increase in the prime rate to 3.50% on Jan 24, 2006.  There is a strong chance that this will be the last increase by the BOC for the year.  With the Canadian dollar expected to reach 90c per USD level, economists believe that the BOC will need to slow down on rate increases (to slow down the appreciation of the Canadian dollar).

With interest rates leveling off, this is probably a good time to reconsider a variable rate mortgage (unless you have already locked-in a good fixed rate mortgage).  Interest rates will likely drop starting in 2007 so there is minimal benefits to locking in at the current interest rate.

Rates and Charts

Prime @ 5.00%

Term	18	Nov 25	Dec 2	Dec 9	Dec 16	Dec 23	Dec 30
3 year	4.75%	4.75%	4.75%	4.75%	4.75%	4.90%	4.90%
5 year	4.95%	4.95%	4.94%	4.94%	4.94%	4.99%	4.99%
10 year	5.34%	5.34%	5.34%	5.34%	5.34%	5.34%	5.34%

Table shows the discounted residential mortgage rates for 3, 5 and 10 yr closed fixed rate mortgages

For a longer term view, click here to see the 3, 5 & 10 year best residential rate since September 2003 (updated monthly)

Click to view other relevant graphs

 

1) Graph of 5 year residential mortgage rate and prime rate since 1951

2) Graph of 5 year posted rate since January 2000

3) Graph comparing the 5 year mortgage rate versus variable at prime - 0.80%

Pre-payment options 

There are two or three ways lenders allow borrowers to prepay their closed mortgage without incurring a penalty:

• First, borrowers are allowed to pre-pay a certain percentage of the original mortgage amount (generally between 15 - 25% of the original mortgage amount).    For example, if your lender offers 20% prepayment and your original mortgage amount is $200,000, you're generally allowed to prepay $40,000 during a 12 month period.
• Second, borrowers are also allowed to increase monthly payment by a certain percentage (between 10% - 20%).  For example, if the lender allows you to increase your payments by 20% and your payments are $1,000 per month, you can advise your lender that you want to increase your payments to $1,200.
• The third way is to double up on  a certain payment date. For example, if your payments are $1,000 per month, you are allowed to pay $2,000 on a payment date,

You may find in your lender's documentation under prepayment options, the ability to pay "15 + 20 + double up".  This means that you prepay 15% of the original mortgage amount during a 12 month period, increase your payments by another 20% and lastly, you can double your payments.

Be sure to ask your mortgage broker about prepayment options.  If you don't expect yourself using these options (or require a smaller prepayment option), your broker may be able to find a lender willing to provide a lower interest rate.