May 2010 Market Update
Last week, the Royal Bank boosted its mortgage rates for the third time in a month. The move increased RBC's posted 5-year closed rate to 6.25% (Note: the posted rate is rarely paid. A good mortgage broker or even your own negotiating skills will often result in a lower rate being offered by a bank) and this has come amid overtures that the Bank of Canada will be looking to raise its overnight rate starting June 1st. That said, as of this writing, there are still some very competitive rates out there.
Fixed vs. Variable
The reason that fixed-rate mortgages have moved up even though the Bank of Canada (BoC) has yet to increase their overnight rate is a function of how the Big Banks fund their mortgage products.
Fixed-rate mortgages are usually funded via the bond market, which fluctuates and is forward-looking, like most markets. Therefore, as prices for bonds increase in anticipation of the BoC's expected rate increases in the summer, fixed-rate mortgages that rely on their funding via these instruments must also increase.
Variable rates, on the other hand, are funded via the BoC's overnight rate and therefore follow its fluctuations. That's why today's variable rate has remained unchanged despite three hikes in its fixed-rate brethren.
So which instrument should you use?
This question effectively boils down to risk-aversion. Historically, since 1975, variable rate mortgages have proven to be more financially beneficial 82% of the time. Risk and reward go hand in hand, so if you are willing to take on additional risk and have the financial wherewithal to weather potentially higher interest rates, a variable mortgage may be for you.
If, however, you want cost-certainty in your life and have lower financial flexibility, it may be worthwhile to pay more in return for a full night's sleep.