Mortgage rates drop in minor tweeking

Canadian mortgage rates dropped a tenth of a percentage point today -- a minor tweaking that keeps one-year and five-year fixed rates abnormally close to each other.

"There's an inverted yield curve now and many lenders don't want to lend money on a short-term basis," said mortgage broker Kris Budisa, regional manager of Mortgage Alliance. "They're doing whatever they can to get clients to take longer terms of five years or more."

(An inverted yield curve happens when long-term debt instruments have lower yields than short-term instruments, a situation that's considered to forecast an economic downturn.)

At TD Canada Trust, the fixed rate on a one-year closed mortgage fell a tenth of a point to 6.4 per cent while the rate on a five-year term dropped a twentieth of a point to 6.45 per cent. Under normal conditions, the five-year rate would be at least a percentage point higher than the one-year.

The bank's variable-rate mortgage, which moves with the Bank of Canada rate, was unchanged at 5.5 per cent.

Budisa said the five-year fixed-rate mortgage remains the most popular choice by far, even though it's not always the best option for everyone.

"A lot of people don't understand their options so they just keep doing what they've always done, which is to take a five-year term," he said. "But if you look back over the past 80 years, going with a five-year rate is not always the best choice for many clients."

Current mortgage rates generally are less than a percentage point higher than they were a year ago and Budisa doesn't expect they will go a lot higher in the near future, noting banks continue to offer "incredibly good rates" on 10-year mortgages (7.05 per cent at TD Canada Trust).

"That tells you where they think rates are going to be 10 years from now -- modestly increasing but with no huge spikes in store," he said.

VanCity Credit Union chief operating officer Ian Warner said there appeared to be no huge advantage this year for borrowers who chose either a variable or a fixed-rate mortgage. A year ago, a variable-rate mortgage was available for 5.25 per cent but it averaged 5.06 per cent over the year, compared with 5.1 per cent on a fixed-rate mortgage.

Warner said mortgage lending activity has slowed down recently as the housing market takes a breather. But he noted house prices continue to rise, which increases the demand for higher-value mortgages.

"We still expect to do very well next year," he said. "We might write fewer mortgages but there should be a higher dollar value per mortgage."

Warner said mortgages with 30-year and 35-year amortization periods remain popular among many buyers striving to make a home purchase as affordable as possible.

Credit Union Central of B.C. chief economist Helmut Pastrick said stronger economic growth in the second half of 2007 should put upward pressure on long-term mortgage rates next year, with five-year rates being as much as half a percentage point above current levels. He said shorter-term rates will remain in a fairly tight range.

Pastrick expects mortgage rates will remain at levels low enough to support a healthy housing industry, with B.C. housing sales declining by about five per cent next year while housing starts drop by just one per cent.

He said the choice between a variable-rate or fixed-rate mortgage next year will depend on a person's individual circumstance.

"If a person is a new buyer and relatively new to the job market, it probably makes more sense to go for three or five years at a fixed rate," he said.

(prepared by Bruce Constantineau/Vancouver Sun)