INTEREST RATES: Rate protection comes at a price

How much protection do you really need? The latest prophylactic being sold to homeowners worried about getting caught with nasty high interest rates is something called the RateCapper from Royal Bank of Canada. It's a product that offers you a variable rate that floats with prime, but guarantees your mortgage rate will not go beyond a certain point during the five-year term.

The price--there's always a price -- is that you give up the discount that you can negotiate off the prime rate.

National Bank of Canada has had a capped-rate mortgage product in the marketplace since March 2000. But trying to sell rate protection during a period of record-low interest rates would be as difficult as selling abstinence during the free-love 1960s.

"This product was not as popular [in the past couple of years] as it will be now," says Jonathan Haziza, mortgage solutions product officer with National Bank of Canada.

With the National Bank's Capped Rate product, for the term of your mortgage your rate can't go above the five-year posted rate, now 6.25%, at the time you sign your mortgage. But instead of getting a variable-rate product as low as 1.75%, you are borrowing at 2.9% today.

I can just hear the conversation in the bank: "Honey, we'd better get some protection. We don't want any nasty surprises, do we?"

But at what price that peace of mind? Mr. Haziza concedes National Bank is reconsidering its rates now that Royal Bank stepped in last week with the RateCapper.

The Royal Bank product, also for a five-year term, guarantees your rate cannot go above 5.875%, but allows consumers to borrow at prime, or 2.25% today. The price is not quite as steep as National Bank's product, but consumers are still paying for it.

"It's the best product in a rising-rate environment for consumers who can't choose between fixed and variable," says Anjel Van Damme, Royal's director of home-equity financing products. "They get all the benefits of variables, but they know their price won't go beyond a certain point."

The bank protects itself from the possibility of rates skyrocketing through hedging. It should be noted consumers can exit the Royal Bank product with the usual variable-rate penalty of three months of payments, albeit based on the higher capped rate.

This type of product may become the latest craze, and there is nothing wrong with banks giving consumers options. But do you really want to take a pass on the almost-free money of this generation?

Rob McLister, editor of Canadian Mortgage Trends, says if you think rates are going to jump you should lock into a five-year fixed-rate product, which he says is still as low 4.35%.

"It's a bad deal," Mr. Mc-Lister says. "You are giving up quite a bit with these things."

He adds that over the past decade, prime has averaged 4.81%, and 5.85% since 1991. Even if prime jumps by four percentage points, he says consumers would still be ahead with the variable option

(prepared by Garry Marr/Financial Post/National Post)