The Globe and Mail
Page: B15
Section: Business
Byline: by Rob Carrick

If you're wondering what's keeping housing prices on the rise, just take a look at how mortgage rates are falling.

Not all rates, of course. If you've been looking at fixed-rate mortgages lately, you'll have noticed that rates edged up a little in recent weeks. Variable-rate mortgages are another matter, though.

Intense competition among lenders is actually driving the price of variable-rate mortgages lower. Bank of Nova Scotia's Flex Value Mortgage is priced at the prime rate (now 4.25 per cent) minus 0.75 of a percentage point, while the mortgage broker Invis says that some of the lenders it deals with are offering discounts of 0.8 of a point off prime. The net result is a mortgage as low as 3.45 per cent, which may cause you to do a double-take if you've been in the mortgage market long enough to recall the double-digit rates of 10 years ago and longer.

The decline in prices for variable-rate mortgages is especially notable when you consider that lenders peg these loans to their prime lending rate for top customers. The prime has been stable recently and most analysts would forecast an increase if asked to predict what the future holds.

Low rates for variable-rate mortgages aren't fuelling the housing market alone, but they do help. In a report on national home sales issued this week, realtor Royal LePage said prices for the average two-storey home increased 6.9 per cent in the first quarter of 2005. Increases like this would normally make homes less affordable, but falling variable-rate mortgages are offsetting this for now.

Invis reports that 55 per cent of its clients are going with a floating rate, while Scotiabank says a majority of customers renewing mortgages are going that route. The reason is obvious: Posted five-year mortgage rates are as high as 6.25 per cent at major banks and about the cheapest rate you'll find is the 4.9 per cent offered by some alternative lenders.

Increases in the prime rate would certainly make variable-rate mortgages more expensive. Never forget that if you choose a floating-rate mortgage. And yet, the prime would have to rise substantially to be more expensive than today's five-year rates. If this sort of logic has you thinking about a variable-rate mortgage, be sure to do a comparison of the deals because some lenders are trumpeting rates that aren't as low as you can go.

A case in point is Bank of Montreal, which has a six-year variable-rate mortgage that comes with a teaser discount of 2.25 percentage points in the first three months and then 0.375 of a point thereafter. The overall rate discount would give you a rate of 3.8 per cent, or 0.35 of a point off prime.

Canadian Imperial Bank of Commerce helped spark competition on variable-rate mortgages a few years ago with its Better Than Prime product. Today, it offers a 3.88-per-cent rate based on a nine-month teaser discount of 1.10 points and 0.25 of a point thereafter.

Toronto-Dominion Bank's TD Canada Trust branches and the on-line bank President's Choice Financial are offering discounts of 0.55 of a point, which makes for a 3.7-per-cent rate today. Royal Bank of Canada is the odd bank out in the competition. It's avoiding promotions in favour of offering discounts based on the client's relationship with the bank.

Invis reports that clients of most banks may be able to negotiate a discount on variable-rate mortgages of 0.75 of a point. So don't let your lender pretend it's doing you any great favours with a promotion offering a lesser price reduction.

Rates are the top consideration when choosing a variable-rate mortgage, but there are others as well. Notably, you'll want to compare the terms on which you can switch into a fixed-rate mortgage should the need arise because of soaring interest rates.

Scotiabank's Flex Value product guarantees that you'll be able to move into a five-year mortgage with a rate discount of a full point, but there doesn't seem to be a similar pledge if you want a shorter term. Other lenders may offer no firm commitments at all about what fixed rate you'll get if you bail on your variable-rate loan.

Another matter is whether you'll be able to choose between weekly, bi-weekly, semi-monthly or monthly payments. Some lenders may limit you to monthly payments, which eliminates the opportunity to pay more frequently and thereby cut your interest costs.

One last point is to ask about the flexibility you have in setting the amount of your mortgage payments. The common wisdom is that you should set your payments higher than they'd normally be if you pegged them to your discounted rate. You give yourself some leeway if borrowing costs rise by doing this, and in the meantime the excess amount of your payments goes right toward your mortgage principal.

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