The London Free Press
Page: C2
Section: Business
Byline: by David Paddon, CP
Column: Money Monitor

Although the U.S. Federal Reserve is expected to continue raising short-term interest rates this year, financial experts say the typical Canadian borrower needn't be too concerned.

The Bank of Canada appears to be raising its historically low rates at a more moderate pace than its American counterpart and there is a wide range of rates available -- and not all are going up. Moshe Milevsky, a professor at York University's Schulich School of Business, says "the biggest, absolutely the biggest, misconception on the part of students, as well as the public, is they think interest rates are just one number."

"The truth is, interest rates can go up and down at the same day at the same time because there are so many types of interest rate," Milevsky says.

Anybody with a mortgage is probably aware of the range of rates available.

For instance, one Canadian bank recently posted rates for closed mortgages, giving a choice of eight terms with eight different rates, ranging from 5.05 per cent for a one-year term to 8.15 per cent annually for 25 years.

On the same day, the same bank was offering "variable rate" mortgages, which are more responsive to changes in the Bank of Canada's short-term rates, for 4.25 per cent with a one-year or two-year term.

In addition, it's now common for banks and mortgage brokers to offer rates that are below posted rates like those.

The actual five-year, fixed-rate mortgage rate is between 1.25 and 1.4 percentage points below the posted price, says Andrew Moor, CEO of Invis Inc., a national mortgage broker. There are several lenders offering variable rates at 0.8 per cent below the banks' prime rate,which is closely tied to the Bank of Canada's key rate.

Currently, the Canadian prime rate is 4.25 per cent, meaning a variable-rate mortgage rate can be as low as 3.45 per cent.

Longer-term rates are usually higher, but at least they provide more certainty. They'll stay the same even if, or when, the Bank of Canada and prime rates start to rise.

Whether to lock in a longer-term mortgage "depends on the individual situation," says Ted Carmichael, an economist with JPMorgan Securities Canada.

"If your opinion is that inflation isn't going to get too high and mortgage rates aren't going to climb too much, you should be comfortable staying with a floating rate, which will be lower," he says. On the other hand, if you're worried about oil prices going to $100 US a barrel, inflation picking up and interest rates rising, you might sleep better if you locked in at a rate that may be higher but you know is affordable, Carmichael says.

While a lot of attention is paid to what central banks are doing, Milevsky says what the Fed and the Bank of Canada do is only part of the picture.

For instance, credit card rates -- an expensive type of debt with annual rates ranging from about 15 per cent to 25 per cent -- are usually more responsive to default rates among consumers than to the central banks' interest rate policies.

Similarly, interest rates that are charged on student loans are generally not greatly influenced by changes to the central banks' short-term rates.

Milevsky also argues there are also "bad" and "good" types of debt.

"Take a look at what you did with the money you borrowed. And if the answer is you're investing it, that's good debt. If the answer is, you're consuming it -- that's bad debt"

Pay off credit cards, car leases or loans and student loans as soon as possible -- starting with those with the highest interest rates -- but consider borrowing to invest in something that will grow in value over time, he advises.

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