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March 2006

Market commentary & Interest rate trends

The Bank of Canada (BOC) increased the overnight rate by 1/4% to 3.5% on Jan 24 and another quarter percentage increase is expected on Mar 7.  This will bring the prime rate to 5.5%.   CIBC is expecting this to be the last increase for the year before the rates drop off in 2007.

You may find it odd to know that before the BOC started to increase the bank rate in Sept 2004, the prime rate was at 3.75% and the 5 year fixed rate was at 5.05%.  Now, the prime rate is at 5.25% and the 5 year fixed is at 5.1%.  This illustrates the fact that the variable and fixed rates follow different trends.

With the small difference between the best variable rate mortgage (4.35% currently) and the 5 year fixed of 5.1%, the savings from a variable rate mortgage and a 5 year fixed is not significant.  The added cost of the fixed rate may be worth it given the small gap between the variable rate and the 5 year fixed..

Rates and Charts

Prime @ 5.25% (next review on Mar 7, 2006)

Term	Jan 13	Jan 20	Jan 27	Feb 3	Feb 10	Feb 17	Feb 24
3 year	4.90%	4.90%	4.90%	4.90%	4.90%	5.00%	5.00%
5 year	4.99%	4.99%	4.99%	4.99%	4.99%	5.10%	5.10%
10 year	5.33%	5.33%	5.33%	5.34%	5.34%	5.50%	5.50%

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%

Amortization Options - 25, 30, 35,  40 year amortizations are available 

Most home purchasers think that their only option is a 25 year amortizing mortgage.  This is the maximium amortization offered by the major banks.   In fact, there have been institutions offering longer amortizations.  Some all allow you to pay up to 40 years.

Longer amortizations may work well for some home buyers.  These type of mortgages result in a lower montly payment which could ease the already strained cash flow of many home buyers.  As borrower's income increases, the borrower always has the option to shorten the amortization.  Secondly, a lower payment allows the buyer to purchase a larger home.

CMHC is partnering with a select few lending institutions to offer 30 yr amortiazations.  Eventually, all CMHC approved lenders will offer 30 yr amortizations as a standard product.