fixed or variable – what is better

The security of fixed-rate or the cost savings of adjustable-rate — which mortgage is better for you?
All mortgages are not created equal. In addition to principal amount, interest rate, amortization period, prepayment options and whether the mortgage is “open” or “closed,” the remaining major characteristic is whether the interest rate is fixed or adjustable.

Both fixed and adjustable-rate mortgages have consistent monthly payments that blend interest costs and principal repayment. They differ in how the payment is applied between interest and principal.

On a fixed-rate mortgage, the proportion of the payment applied to interest and principal changes over time according to a standard schedule. In the early years of a mortgage, more of each payment is applied to interest, and less to the principal. In later years, less is applied to interest and more to reducing the principal.

With a adjustable-rate mortgage, the amounts applied to interest and principal vary [from the standard schedule] as the interest rate moves up or down. As rates increase, more of the payment is applied to interest and less goes to principal. When interest rates go down, less is applied to interest costs and more to principal.

Which is right for you depends on your risk tolerance. If an increase of 0.25 per cent in the interest rate would concern you, or substantially affect your budget, then a fixed-rate mortgage may be a better choice. However, today, the security of a fixed rate comes at a slightly higher price.

Research suggests adjustable-rate mortgages benefit consumers. From 1950 – 2000, Milevsky found that homeowners with a $100,000 mortgage (15 year amortization) would have saved approximately $22,000 in interest costs by borrowing at the prime rate instead of the five-year rate. Further, he found that choosing the adjustable rate benefited the homeowner during 88 per cent of the period studied.

To find out more about fixed versus adjustable mortgages or to see what solution best suits your needs, contact me today!

Prime up 1/4% as expected

Comment: many think that Prime will hold here or go to 3% and hold there for a long while as the economy gets going again.

1/4% Prime Raise

The Bank of Canada raised its benchmark interest rate by 25 basis points for the second time in two months, even as households and governments in the developed world continue to cut back on spending.

The rate is now 0.75 per cent. The bank said any further increases “would have to be weighed carefully against domestic and global economic developments.”

The central bank became the only one in the Group of Seven to hike its key lending rate after keeping it at unprecedented lows during the recession.

While economic growth in Canada has largely relied on consumer spending, the bank now projects that business and trade will make up a larger part of the country’s gross domestic product, but overall growth won’t be as large as the bank previously thought.

The bank now estimates that Canadian GDP will expand 3.5 per cent in 2010 and 2.9 per cent in 2011, down from the previous projection of 3.7 per cent and 3.1 per cent respectively.

Prime rate increase in the cards

comment: Variable rates should stay a good mortgage option as Prime is expected to stay at 3% for the rest of the year. Prime – .6% will be a 2.4% mortgage rate and the fixed rates will stay around the 4% mark. The great thing is fixed rates are coming down now so a variable will save now and you can lock in later when the 5 year fixed is even lower.

Week Ahead: Rate hike in the cards

Kim Covert, Financial Post · Friday, Jul. 16, 2010

OTTAWA — Two major announcements bookending the coming week’s economic news will provide a clearer snapshot of the state of the Canadian recovery.

The Bank of Canada will be first up when it makes its monthly interest rate announcement on Tuesday. But that will come before Friday’s critical report from Statistics Canada on the country’s consumer price index for June.

The central bank raised its benchmark index rate in June by 25 basis points, and at the time expectations were that the rate would increase steadily. But in the weeks since that announcement concerns about a double-dip recession have been growing, increasing speculation that the bank would hold the course. Consensus expectation is for a 25 basis-point increase on Tuesday, bringing the rate to 0.75%, though analysts disagree on what will happen as the year unfolds.

“While both domestic and global conditions have deteriorated modestly since June, the underlying momentum in the Canadian economy warrants the continued normalization of policy in the near term,” wrote strategist David Tulk of TD Securities in a note to investors. “When we look further into the future, the impact of financial market turmoil and decelerating economic growth is more difficult to quantify. In recognition of this uncertainty, we have scaled back our forecast for rate increases, and now look for a year-end overnight rate of 1.25% and a rate of 2.50% by the end of 2011.”

Economist Michael Gregory of BMO Economics, who also calls for a another 25 basis point increase, said he expects the bank to make one more increase of that size in September then hold the line for the remainder of the year. CIBC is calling for the rate to reach 1.25% in October, followed by a pause lasting at least two quarters.

The Bank of Canada’s rate announcement will come ahead of the key June inflation report on Friday. The consensus expectation is for 0.1% month-over-month drop in the consumer price index on lower gasoline prices, while the core year-over-year inflation rate will be unchanged at 1.8%, below the Bank of Canada’s target of two%.

CIBC economist Krishen Rangasamy said that while the rate announcement will precede the CPI, he doesn’t expect the “milder” June prices will have any effect on the rate. He said July’s prices should get a bounce from the harmonized sales tax introduced on July 1 in Ontario in British Columbia.

The bank will also release its Monetary Policy Report on Thursday. Mr. Rangasamy doesn’t expect the bank to make material changes to its April forecast of 3.5% growth for the second half.

“The only thing will be perhaps in the tone of the report. We think that they might adopt a more cautious tone on the external environment, particularly what’s happening in Europe and elsewhere, with slower Chinese growth, so they might adopt a little bit more cautious tone as opposed to their upbeat tone in April.”

Statistics Canada reports in the coming week include securities transactions on Monday, travel data on Tuesday, wholesale trade on Wednesday, as well as employment insurance and retail trade data on Thursday.

On the corporate front, some major Canadian companies will be reporting earnings on Thursday, including Canadian National Railway, Shoppers Drug Mart and Loblaw Cos.

Mortgage Market Primer

Mortgage Market Primer (TD)

Mortgage-Market-Primer If you have any interest in the nitty gritty of Canada’s mortgage industry, TD Securities’ Eric Lascelles has put out this fantastic market overview: Canadian Mortgage Market Primer

Here are some of the more notable points…

  • 70% of Canadian lenders are deposit-taking institutions (Page 1)
  • 5-year GICs and the Interest Rate Act are two reasons Canadian mortgage terms are usually five years or less (Page 5)
  • There is a difference between Adjustable Rate Mortgages (ARMs) and Variable Rate Mortgages (VRMs). Both have variable rates but the former has variable payments while the latter has “fixed” payments. (Page 5)
  • For any term over five years, the pre-payment penalty cannot be greater than three months interest once five years have elapsed. (Page 7)
  • “Given a mortgage delinquency rate of 0.44% and the assumption of a (pessimistic) recovery rate of 80%, this means that expected mortgage portfolio losses for Canadian lenders are less than 10 basis points per year for uninsured mortgages.” (Page 8)
  • About 50% of Canadian mortgages are insured. (Page 8)
  • “Even with an insured mortgage, the lending institution manages the mortgage, directly handling payment collection, foreclosure, and sale of the home, where applicable.” (Page 10)
  • 29% of Canadian mortgages are securitized versus 60% in the U.S. (Page 10)


  • $175 billion of the $275 billion in Canadian securitized mortgages (64%) are sold into the Canada Mortgage Bond (CMB) program. (Page 10)
  • Canadian borrowers can usually prepay 10-25% of their mortgage each year without penalty, but the average prepayment is less than 1%. (Page 11)
  • It is estimated that the Insured Mortgage Purchase Program (IMPP), which allowed the government to buy back mortgages during the credit crisis in 2008-2010, netted the government extra profit of roughly $187.5 million. (Page 11)
  • Lenders (or their agents) must continue servicing a mortgage after it’s sold into the CMB program—including assuming all pre-payment and uncovered default-related costs. Mortgage Insurance does not make lenders completely whole in the event of default. (Page 13)
  • Canadian-Mortgage-Bonds The CMB program intentionally operates on a break-even basis (Page 14)
  • Mortgage defaults “would have to increase by three- to four-fold to compromise the profitability” of CMHC’s default insurance program. CMHC should have ~$8.8 billion in insurance retained earnings as a buffer for its insurance business in 2010. (Page 15)
  • Like any insurance business, CMHC’s is not completely without risk. (See Page 16)
  • The CMB program adds very little additional risk for CMHC. The underlying mortgages are already insured. (Page 15)
  • 71% of mortgagors with CMHC insurance have “equity in their homes of more than 20%.” (Page 16)
  • “Over 40% of CMHC’s total business in 2008 was in areas, or for housing options, that are less well served or not served at all by the private sector mortgage insurers.” (Page 17)

Canadian Prime rate to go up only a bit.

As expected the economy is not as hot as every one thought. That means that Prime – as below – is now predicted to go up to .5% and then hold there or up to 1% for the rest of the year.

This means that the Variable rates are now very attractive because we know where Prime is headed – as in holding constant. A variable at Prime -.6 today is 2.5-.6= 1.9%. The 5 year fixed are more like 4.30%

Weak Canadian GDP puts BoC on the spot

Eric Lam, Financial Post · Friday, Jul. 2, 2010

With Canada’s economy stumbling in April, adding fuel to speculation the country’s roaring recovery that began in September 2009 was coming to an abrupt end, economists warned Canada’s central bank will have to tread carefully on its plan to raise interest rates for the rest of the year.

Derek Holt and Gorica Djeric, economists with Scotia Capital, said the Bank of Canada “was not likely to be swayed” by Wednesday’s economic data. The pair maintain a forecasted 1.25% benchmark rate by the end of the year.

“There should be enough strength in the underlying economic momentum to dismiss the drag on GDP in April as something that does not portend the start of a new trend,” the pair say in a note.

In April, Canada’s gross domestic product neither expanded nor contracted, compared with 0.6% growth in March. Economists surveyed by Bloomberg had been forecasting 0.2% growth in GDP for April.

This is the first time in eight months Canada’s economy did not expand.

In its report, Statistics Canada blames the stagnant April on a “large decline” in retail trade of 1.7%, after a 1.9% gain in March. Declines in manufacturing and utilities also contributed to the underperformance while advances in mining, wholesale trade, the public sector and construction helped to offset the decreases.

Krishen Rangasamy, economist with CIBC World Markets, said it was too soon to jump to conclusions.

“It’s too early to conclude from this GDP report that the recovery is already waning,” he said in a note on Wednesday. “The excellent handoff from March means that we’re starting the second quarter from a higher base, which sets Canada up for a decent quarter despite a slow start.”

Michael Gregory, senior economist with BMO Capital Markets, said that while the 3% growth now expected is respectable, it is a bit of a letdown compared with the 5% to 6% growth figures seen earlier.

“It’s kind of like driving on the highway at 100 kilometres an hour, then getting off and going 50,” he said in an interview. “But 3% growth is still all right and where we see it for this year.”

The second half of the year will likely move quite sluggishly, however, as a lot of spending in housing, renovation and other big-ticket items was “pulled forward” due to the HST, introduced in July in Ontario and British Columbia. Mr. Gregory expects growth of about 2% on average in the fall and winter months.

Canada’s economy also faces headwinds from the sovereign debt crisis in Europe, an even worse slowdown in the United States, and possible fallout in China, he warned.

Warren Jestin, chief economist with Scotia Economics, said in a note on Wednesday that Canada’s position as a resource leader should help keep it afloat in the face of other developed countries, although “this won’t be a hard race to win.”

The situation in Europe is troubling for Mr. Gregory, but he suspects the combination of weakening housing, high unemployment and zero credit growth will hurt the United States.

“That buzz you hear about a possible double-dip recession is legitimate and will remain a worry for markets the rest of the summer and into the fall,” he said. “It’s why we think the Bank of Canada will be on hold for a while after July.”

Mr. Gregory figures the central bank will raise rates 25 basis points at its next meeting in July, then go on hold to see how things play out in Canada the rest of the year. It is likely the BoC will push rates to 1% by the end of 2010 and add another 1 percentage point to 1.5 percentage points in 2011.

“An environment of 3% growth is still something that requires higher interest rates,” he said. “Rapid buildup in household debt is a long-term risk.”