The Vancouver Sun
Wednesday, December 07, 2005

Cost of borrowing nudges higher: Homeowners with mortgages have to consider whether it's worth locking in as rates move up

OTTAWA -- Borrowing costs rose another quarter point Tuesday to nearly a 2 1/2-year high, and are expected to continue rising in the new year, raising questions for some homeowners and buyers about whether it may be time to lock in that mortgage now.

The central bank raised its trend-setting target for overnight loans to 3.25 per cent Tuesday, its third quarter-point increase since it resumed raising rates in September, and which again was quickly followed by matching increases to five per cent in commercial banks' prime rates to which variable rate mortgages are tied.

Using the Bank of Montreal's three-year open variable mortgage rate (which rose to 5.00 per cent from 4.75 per cent) as an example, the latest rate increase will push the monthly payment on a $150,000 mortgage with a 25-year amortization to $876 from $855.

"It appears that the palatable period of low interest rates is coming to an end," said Invis, a major Canadian mortgage broker. "With at least two more rate hikes expected in 2006, it's enough to make many homeowners feel a little apprehensive."

Roughly one-third of existing mortgages are variable.

Further, some analysts say there could be as many as five more quarter-point interest rate increases over the coming year.

"If you are in a variable rate product now -- or considering one -- can you afford an increase, as some have forecasted, of another 1.25 percentage point by sometime next year?" Investors Group asked in a report in which it suggested some homeowners or buyers may want to seek the advice of a financial planner.

The Bank of Canada made it clear there are more rate hikes coming.

"Some further reduction in monetary stimulus will be required ... [to] keep inflation on target." Bank of Montreal economist Sal Guatieri said the comments from the bank "support our view that the overnight rate target will continue to climb steadily and gradually ... to a more neutral level of 4.5 per cent by October."

However, that doesn't necessarily mean that a fixed rate mortgage would be better, Karl Madsen, regional manager of mortgage broker Invis, said in an interview from Vancouver. "It largely depends on your risk tolerance as a consumer," he said, noting that some people might be more comfortable with a fixed rate but some would prefer to take their chances with what are sill lower rate variable mortgages.

While there are competitive longer-term fixed rates today, reflecting the fact that longer-term rates have been relatively stable, shorter-term rates could fall again leaving someone with a variable rate mortgage better off over the longer haul, he noted.

Reinforcing the view, however, that rates will be rising further first were reports Tuesday suggesting the economy is still hot.

Statistics Canada reported an unexpectedly strong increase in home-building plans in October, while local real estate boards in Montreal and Toronto reported strong sales of existing homes in those markets last month.

"The value of housing permits continued to progress in October as contractors took out $3.4-billion worth of housing permits, up 2.4 per cent from September and the sixth monthly gain in the housing sector in seven months... to its highest value since June 2004," Statistics Canada said. "The demand for new dwellings remained positively affected by the growth in employment and by the still advantageous mortgage rates," it said.

Non-residential building plans slipped 0.9 per cent to $1.9 billion in October, but remained at strong levels, Statistics Canada also reported.

"The total value of building permits reached $50.5 billion between January and October, up 10.9 per cent from the same period last year, it noted.

"Several economic indicators have pointed to good health in the non-residential sector recently," it said, noting corporate profits have risen for four straight quarters and in 13 of the past 15 quarters, and were at a record high in the third quarter.

The reports are just the latest evidence of economic strength, which includes the lowest jobless rate in three decades.

"In light of recent economic strength, today's rate hike is entirely justified," said TD Securities economist Eric Lascelles.

"What's more, the Canadian economy will need further monetary inoculations to prevent inflation from becoming uncomfortably hot."

A concern of some analysts, however, is that higher interest rates will push up the value of the dollar and will have a greater dampening impact on the already relatively weaker industrial economies of Central Canada but little impact on the hot resource based economies in the West.

The Canadian dollar is already at a near-14-year high just below 86.5 cents US.