The 2.75% Danger
June 20th 2009
Toronto’s housing market proved
all the experts wrong. As condo and house prices collapsed
around the world, Canadian prices actually increased. In fact,
average housing prices in Canada are now 80% higher than the
U.S. and our prices are even substantially higher than the
average American prices were at the peak of their market.
Most people attribute this to our
historically low mortgage rates, with variable rates as little
as 2.75% and in some cases requiring interest only. (Imagine
being able to carry a half million dollar mortgage for about
$1,200.00 a month, sounds like
Las Vegas a couple of years
ago.) In the meantime, conventional fixed five year mortgages
have increased from 4% to 4.5% and they are expected to climb
further.
So why are variable rates so
cheap? Because millions of people are keeping their money in
the bank waiting for rates to increase before they’re prepared
to lock-in. The banks have an abundance of short term money and
not as much long-term money. People are investing that money
into the stock market and others are buying real estate like
condos as an investment. In the U.S., AAA tax exempt municipal
bonds are paying as high as 5.62%. Corporate bonds are paying
even more.
So even at 4.5%, fixed rate
mortgages are a bargain. Eventually, variable rate mortgages
will increase as well, and when you finally lock in, rates could
be six, seven, or even 8%. If you’re gambler, stay with a variable,
but for peace of mind you’re probably better getting a fixed
rate mortgage.
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