The Ottawa Citizen
Wednesday, December 07, 2005

Borrowing costs rose another quarter point yesterday to nearly a 2 1/2-year high, and are expected to continue rising in the new year, raising questions for some home owners 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 yesterday, 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 Inc., a major Canadian mortgage broker, in a statement. "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 financial advice.

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 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 still lower rate variable mortgages.

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