Modest increase foreseen for interest rates

Canadians should be prepared for a modest hike in mortgage rates as the Bank of Canada turns its attention away from stimulating the economy and toward curbing inflation.

This prospect, combined with other rising costs, will likely cause more homeowners to opt for the security of locking in their mortgages.

That will be the case even though, for now, variable rates are still at least a percentage point cheaper.

"It's human nature to be on the cautious side, and I expect we'll start to see more of a shift to fixed," said Gary Siegle, regional manager, Prairies, for mortgage broker Invis.

About 40 per cent of Mr. Siegle's clients have variable-rate mortgages. Currently, his customers can get a variable mortgage at a rate of 4.15 per cent, a 0.6-percentage-point discount from the banks' prime rate. That compares with 5.15 per cent for the lowest-cost, five-year fixed mortgage Invis can access, a product that comes with a lot of conditions including a quick closing, Mr. Siegle added.

Yesterday's surprise decision by the central bank to freeze rather than cut its key lending rate hasn't hit mortgage rates yet.

However, fixed-rate mortgages, which move in tandem with long-term bond yields, should creep up in the next six months as the bond market is hit by concerns about the rising cost of living, said Benjamin Tal, senior economist at CIBC World Markets Inc.

"The No. 1 enemy of the bond market and long-term rates is inflation," Mr. Tal said.

Variable-rate mortgages are tied to the prime rate set by the banks for their best customers. It fluctuates with the Bank of Canada's key lending rate, and Mr. Tal said he expects the central bank will raise rates next year as it moves to curb inflation.

Mortgage rates will likely start heading up in the near term, although the increase should be a moderate quarter to half a percentage point, said Gerald Soloway, chief executive officer of Home Capital Group Inc., which provides alternative mortgages through its principal subsidiary, Home Trust Co.

"I don't think it will be dramatic. I think there will be a modest increase," Mr. Soloway said.

The current volatility in the economy reinforces his view that the bulk of his company's clients, including people on fixed incomes or on a tight budget, should lock in for the longer term, Mr. Soloway said.

"I really don't think that the average homeowner is equipped to speculate on interest rates. I think fixed is a much better option for people getting a mortgage today. Why not have the certainty and protect the investment in your house?"

Calgary-based Mr. Siegle said he'll continue to encourage customers to consider a variable mortgage. Invis recommends flexible products that allow customers to switch to a fixed rate at any time without being penalized, he added.

With both fixed and floating rates expected to rise, CIBC's Mr. Tal, a long-term proponent of variable mortgages, said he now sees a window of opportunity for homeowners to lock in for the next five years.

(prepared by Lori McLeod/Globe & Mail)