The decision on debt: What's the right mortgage?

Variables at play with recent rule changes and coming hikes

By Martha Uniacke Breen, National Post

For some weeks now, Bank of Canada governor Mark Carney, Finance Minister Jim Flaherty and most of the major Canadian banks have been warning that the record low interest rates of the past several years are over, and that a hike - perhaps even several - is on the horizon. At the same time, the banks have been offering truly incredible deals on longterm fixed rate mortgages, some of them barely higher than prime.

So all of this leaves the variable-rate mortgage holder with the inevitable question: Is it time to lock in from a variable to a fixed rate? Well, as it turns out, the answer is a indisputable, unequivocal - maybe.

For every expert who says that absolutely, you should lock in now while rates are still low, there's another who argues just as confidently that rates are likely to stay put at least till the end of the year, and only a fool would give up a great variable. Here's the essential case both in favour and against locking in; only you can decide which argument feels right to you.

THE CASE FOR LOCKING IN

Both Governor Carney and Finance Minister Flaherty have repeatedly expressed concern at the level of consumer debt Canadians have racked up over years of low interest rates, and rate hikes can be an effective way of cooling excessive credit spending and encouraging us to pay down what we owe. Mr. Flaherty recently made some adjustments to the mortgage rules, designed to soften the rate of mortgage debt Canadians are taking on, though some bankers are arguing the new rules are comparatively toothless. (We'll explore this in more detail in a later column.)

If you're willing to shop around, it's possible to get some real deals on fixed mortgages right now. As of this writing, you can get a five-year closed for as little as 3.09%. According to David Potter, an independent financial planner and the principal of Potter & Partners in Toronto, these deals won't be around forever, and it's unlikely that you'll lose in the long run if you grab one of them, especially if you're taking out a new mortgage or renewing.

Mr. Potter is making the case with many of his clients that they consider locking in to the low long-term fixed rates. The most pertinent issue to ask yourself, he says, is how much uncertainty you can handle - since perhaps the only thing the experts agree on is that no one really knows what the world economy will look like even a year from now. The reassurance of a consistent mortgage payment, no matter where interest rates go from here, takes some of the worry out of being a mortgagee; and if you lock in to one of these bargain rates, you'll be sitting pretty when rates eventually do start to go up.

THE CASE FOR STAYING VARIABLE

But before you go running to the bank, consider the other side of the coin. Kathryn Kotris, a mortgage broker with Mortgage Architects in Toronto, is recommending to at least some of her variable-rate clients that they resist the urge to panic. "Even though some indicators point to the possibility that rates are set to rise, I don't believe we will actually see a hike at least until the end of this year or early 2013," she says.

The principal reason for her skepticism, she says, has to do with the lacklustre state of the international economy; if we were to unilaterally raise our rates even slightly, the value of the Canadian dollar would automatically rise, hurting exports and possibly putting the brakes on the modest growth we've managed since the end of the recent recession. Add to that the simple fact that inflation, the prime target of Bank of Canada monetary policy, is virtually nonexistent at the moment, offering little pressure to move just yet.

If you have a variable rate at prime less a half-point or more, Ms. Kotris says, hang on to it; the banks are no longer offering these highly attractive rates. Current variables as of this week are at 2.79% to 4%. (For new or renewal mortgages, Ms. Kotris, like Mr. Potter, is recommending the long-term fixed rate products.)

Worried about your mortgage payment going up if there's a rate hike? Ms. Kotris has a simple answer. If you have prepayment privileges, and you can voluntarily raise your regular monthly payment by even a few dollars, go ahead and do it; the extra money will go directly toward the principal, and there's less shock to the budget if rates go up later. If you have a variable now and move to a fixed, you will be paying a higher monthly payment and that difference between the variable payment and fixed payment goes to the bank because of higher interest.

"If I needed help to sleep at night, I'd sleep a lot more soundly knowing those extra dollars were paying off my principal, rather than just enriching the bank," she says.

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