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Lock in your mortgage…NOT!!!

May 13, 2010

MortgageBrokerNews.ca posted the following article on their site that generated some good feedback. Banks are continuing to scare people into locking in their mortgages. I wanted to share with you a copy of the article and my response to one of the individuals that commented on the piece.

Here is the article:

With people banking on the main interest rate going up in June, it seems like a good time to for homeowners to lock in their fixed-rate mortgages.

About 12 percent of mortgage holders with fixed-rate mortgages “locked in,” or switched from variable rate mortgages, in the past year, , according to a report this month by Will Dunning, chief economist at the CAAMP , and another 10 percent had already switched from variable more than a year ago.

The rate for conventional five-year mortgages was at 6.25 per cent at the end of April, nearing the 5.25 per cent rate at the end of May last year – the lowest since 1973 when the Bank of Canada data began.

“As interest rates rise, expect home buyers to increasingly opt for fixed-rate loans, in turn leaving banks with more fixed-rate assets to hedge in the swap market” said Mohammed Ahmed, a rates strategist at Canadian Imperial Bank of Commerce in Toronto.

Housing starts rose to a seasonally adjusted annual pace of 201,700 units last month.

Marc comments on the article above
What is all the panic to lock mortgages into fixed rates? Sure interest rates will start rising, they have nowhere else to go, but I have not heard anyone saying that these rate hikes will be aggressive and fast. Being in a variable of 1.70% today is way better than being locked into a 5 year fixed of 4.4%. That’s a difference of 2.7%!!! It will take 10 rate increases or so for the variable to just reach the same level. The question is how many years will it take for rates to increase 10 times?

Here’s my response to the comment above

I agree with Marc. Individuals should attain access to a broad range of information prior to paying such a high premium for security. One could increase the prime rate 15 or 20 times over a five year period and still have a lower balance at maturity. If your having trouble sleeping at night buy a blanket and not a bank’s most profitable term.

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