MORTGAGE: Sweet time to be arranging a mortgage

What a sweet time to be arranging a mortgage - we've got the lowest rates anyone can remember and they'll be around for months to come.

So don't rush into any decisions regarding a new mortgage, a renewal or an existing mortgage you're thinking of breaking. The great recession mortgage sale isn't even close to being over.

The Bank of Canada has records going back to 1950 on average fixed-rate, long-term mortgage rates and the best deal was 5 per cent back in early 1950. Today's posted five-year mortgage rate at the big banks is 5.45 per cent - low, though not the lowest. But discounted five-year rates today are commonly under 4 per cent, which suggest the best on record.
Variable-rate mortgages are even cheaper. The Bank of Canada rate announcement earlier this week took mortgages taken out in the past eight months or so down to about 3.05 per cent, and to less than 2 per cent or thereabouts on older, variable-rate mortgages set up before the financial crisis started to bite.

With a recession raging, the consensus among rate watchers is that there's no reason for mortgages rates to move higher any time soon:

Eric Lascelles, chief economics and rates strategist at TD Securities: "My inclination is to say mortgage rates are likely to remain unusually low for some time."

Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals: "I don't really see rates moving a whole lot."

John Panagakos, mortgage broker in Toronto: "My best guess is that rates will stay where they are for the next 12 months."

If anything, rates could fall slightly in the months ahead thanks to signs of a thaw in the financial market freeze-up that has raised the cost of mortgages and lines of credit in the past six to eight months.

Mr. Dunning said rates on five-year mortgages are typically pegged at 1.1 to 1.2 percentage points more than the five-year Government of Canada bond yield. The spread between the two ballooned out to an average of 3.07 points in 2008 and has since fallen closer to two points.

"There is room for further compression, which could bring mortgage rates down a bit more," he said.

Mr. Panagakos has noticed something similar happening with variable-rate mortgages, which 18 months ago could be had at your bank's prime lending rate minus 0.7 to 0.8 of a point or so. Hard-pressed banks started offering variable-rate mortgages at prime plus 1 per cent last fall, but lately there are some lenders offering these loans at prime plus about 0.6 per cent.

Historically low five-year rates prompt a question if you've got a variable-rate mortgage: Is now the time to use the escape clause in your loan agreement and lock into a five-year mortgage?

If you've got one of those great old variable-rate mortgages with a discount off prime, the answer is no. Borrowing costs would have to rise close to two percentage points to put you on par with a five-year mortgage today at a great discounted rate.

Rates will eventually start to rise, but it's worth noting the Bank of Canada's comments in this regard. Facing a worse-than-expected economy, the central bank said it would keep its benchmark lending rate steady for as long as a year if need be. If the bank's overnight rate stays put, expect the prime rate at the major banks to more or less do likewise.

The question of whether to lock in more recent variable-rate mortgages - those sold at prime plus a markup - requires more thought because of the cheapness of five-year rates right now.

"If you're looking at the bottom of the market and you want five years of security, there's definitely nothing wrong with a 3.95-per-cent rate," said Gary Siegle, regional manager with the mortgage brokerage firm Invis in Calgary.

Low mortgage rates also offer an opportunity for people to break their existing loan agreements and slash their interest costs. Mr. Panagakos believes the penalties are prohibitively expensive for people who are only a year or two into mortgages they want to break. If you have money to cover the penalty, he suggests you use it to pay down your principal.

Another approach to breaking a mortgage: Wait until you have 12 months or less until maturity and ask to renew early at no cost. Still another: Inquire about a blend-and-extend, where you roll an existing mortgage into a new loan at a rate that blends your existing rate with current rates.

Whatever you do, enjoy the rare luxury of time afforded by these recessionary, low-rate times. Shop your new mortgage and your renewal around, and remember that a few years from now today's rates will look freakishly low.

("Don't jump the gun on mortgages" prepared by Rob Carrick/Globe & Mail)

Mortgage facts and figures

4.83% Average mortgage rate paid by homeowners this spring
5.41% Average rate paid in fall 2008
4.91% Average five-year rate arranged in the past year
6.59% Average posted five-year rate over that span
1.68 points Average discount on five-year mortgages
36% Portion of mortgages negotiated in past year that have a variable rate
51.3% Average amount of equity that mortgage holders have in their home
15% Portion of mortgage holders who borrowed against their home equity in past year

Note: This data comes from a report released yesterday by the Canadian Association of Accredited Mortgage Professionals and is based on surveys conducted in March with 2,000 people.