MORTGAGE: Fixed or closed?

When it comes to ranking some of my biggest financial blunders, getting a fixed-rate mortgage when I purchased my first home is right near the top.

"Don't lock in, mate, it never makes sense," I remember a senior columnist at the Financial Post telling me about 11 years ago when my wife and I decided, pre-kids, to lock into a bigger commitment than our marriage.

The gap at the time between a fixed-rate mortgage with a fiveyear term and a variable-rate mortgage tied to prime was so scant it hardly seemed worth the risk.

But even a difference of 50 to 75 basis points -- there are 100 basis points in 1% -- turned into a few thousand bucks lost over the five-year term.

By the time we moved up to a bigger and better house, I didn't need much convincing to go with a variable-rate product.

Of course, it has saved us money.

The question today is: Does it still make sense to go with a variable rate based on market conditions that have changed dramatically in the last eight weeks? By wayof background, in early October, banks were offering variable-rate products at about 60 basis points below prime.

A few months before that, it was almost 90basis points below prime.

But then the credit crisis hit and variable-rate products switched overnight to 100 points above prime.

They have stayed there ever since, leading some of us to question whether they still make sense.

Gary Siegle, Calgary regional manager with Invis Inc., a mortgage consultant firm, says while the deals are not as good as they were in September, there is no question a variable-rate mortgagewill save you money.

This week, the lowest rate you could get on a five-year, fixedterm mortgage was about 5.5%, Mr. Siegle says. Conversely, there was one bank offering a variablerate product at about 75 basis points above prime or 4.75% "That's a significant gap," Mr.

Siegle says. "Plus, what do the economists say will happen to rates? They say they'll go down." There is one other factor added to the mix. The Bank of Canada's rate, usually tied to prime, went down last month, and some of the major banks refused to go along with the cut because it would have cost them too much money.

"Will banks change their rates when the Bank of Canada reduces its rate? It is a good question.

But the last time they resisted, it didn't take long before whatever influence the government of Canada had was wielded and they all followed suit," Mr. Siegle says.

The problem for the banks are all the customers with existing mortgages negotiated at 60 to 90 basis points below prime.

Every rate cut costs the banks money. They are actually losing money on those customers now.

And, according to Mr. Siegle, that is one reason that if you have variable-rate mortgage at a rate below prime, you would have to be "very worried" or "really conservative" to want to lock in that rate.

You would be converting a mortgage as low as 3.1% to one at about 5.5%.

"Those people are sitting pretty,"Mr. Siegle says.

Don't feel too sorry for the banks. They had been pushing variable rates up until the credit crisis hit.

The Canadian Association of Accredited Mortgage Professionals said this week that about 40% of home loans negotiated in the past year were variable-rate products tied to prime.

"We don't know what the impact of getting rid of the discount will be," says Jim Murphy, chief executive of CAAMP.

Don Lawby, chief executive of Century 21 Canada, says even with variable-rate products now 100 points above prime, the issue has not changed.

"It comes down to what you can afford and what is your comfort level," Mr. Lawby says. "For many consumers, they feel comfortable locking in for five years." Ultimately, a fixed-rate product is still like an insurance policy.

Yes, it will make some people feel more comfortable. I don't know about you, but I don't feel all that comfortable paying more interest.

("Fixed rate was my rookie mistake" prepared by Garry Marr/Vancouver Sun)


LOCAL SHUSWAP, SALMON ARM MORTGAGE EXPERTS include:
Any questions re mortgage needs touch base.....

Susan Groot
BMO Bank of Montreal
250-515-2336
susan.groot@bmo.com

Vic Hamilton
Bayfield Mortgage
250.833.9183
1.866.252.4526
vic@sunwave.net

Sue Foubert
TD Canada Trust
250.833.8790
sue.foubert@td.com

Corine Hild
Tekemar
250.832.8766
1.800.658.2345
child@sunwave.net