MORTGAGES: No mortgages on a plate

Six months ago, before the credit crunch bit and risk became a cutting four-letter word, obtaining or renegotiating a mortgage was pretty much a formality.

It's harder now. Financial institutions haven't necessarily changed their lending criteria for mortgages, but they do apply them more strictly. "Grey-area" borrowers who would have received the benefit of the doubt a year or two ago might need to apply several places now before finding a taker.

The doors are still wide open, though, for clients with steady income, significant assets and/or a solid credit history. They are, in fact, the object of keen competition between lenders, and as such are in an excellent bargaining position in what is normally the biggest month of the year for mortgage transactions.

With interest rates near historic lows, housing prices plateauing, and both provincial and federal governments offering tax incentives for renovation and higher RRSP withdrawals for home purchases (now a maximum of $25,000 per person), a compelling case can be made for buying, or converting existing home equity into cash now.

That's provided you feel secure enough about your own situation, the overall economy and resiliency of the real-estate market to take the plunge.

Apparently, many people still do. In RBC's annual home-ownership survey, conducted in January and made public this week, 22 per cent of Quebec respondents said they intend to purchase a home over the next two years, up from 21 per cent in 2008 and 19 per cent in 2007.

But York University professor Moshe Milevsky, who has written extensively about mortgages, cautions that "there are a number of factors that one should take into account when choosing a mortgage, or buying a house that were non-issues a few years ago -- security of career and job, an ample down payment, liquidity concerns. They should all be part of your financing decision."

The half-point reduction of the Bank of Canada's key overnight rate to a record low of 0.5 per cent on March 3 led to a drop in the banks' prime lending rate to 2.5 per cent, which in turn resulted in lower borrowing costs for variable-rate mortgages (though fixed-term mortgages did not move).

Variable-rate mortgages, which are linked to the prime rate, now carry interest rates as low as 3.3 per cent.

That compares favourably to 4.15 per cent for the lowest rate on a five-year fixed mortgage available through Quebec mortgage broker Multi-Prets, though it's not nearly as attractive as the deal secured by variable-rate borrowers before the credit crunch. The prevailing rate then was as much as one per cent below prime, meaning some homeowners today are paying as little as 1.5 per cent. For new lenders, it's prime plus 0.8 per cent, or more.

Rates this low are a huge boost to housing affordability. In mid-2007, the posted five-year rate for fixed mortgages was 7.25 per cent. Today, it's around 5.75 per cent, just 0.05 points above the previous bottom. (Most people are able to negotiate a significantly lower rate than the posted one). A variable rate with a five-year commitment is more than two percentage points cheaper today than in 2007.

With low rates expected to linger through the end of the year, "we expect this trend to continue for at least six more months," CIBC World Markets senior economist Benjamin Tal commented last week.

While the superiority of variable-rate mortgages has been clear-cut over the last two decades, the story may be different in the next few years. In an economic report, the Desjardins group said the Canadian mortgage market has changed in the past few months because of the financial crisis, and says "fixed-rate mortgages currently appear to be the least costly," in part because there's little room for any further discount for variable rates.

While nobody can predict how interest rates will move over a five-year period, Milevsky agrees we may be entering one of the rare times when fixed-rate mortgages are the better deal. According to his 2001 research paper, borrowers were better off going fixed only 12 per cent of the time.

"Today, we might be in one of those scenarios."

(prepared by Paul Delean, Canwest News Service; Montreal Gazette/Vancouver Province)