Another week, another drop in the prime rate. From mortgages to car loans, borrowing costs are falling like autumn leaves. In political circles, the issue du jour is the growing clamor for tax breaks to spur consumer spending. But the federal Liberals will have none of it. Why all the fuss about taxes, Prime Minister Jean Chrétien asked in Vancouver last week, when Canadian families can save $8,000 or $9,000 a year in many cases simply by remortgaging their homes at today’s bargain-basement rates?
Unfortunately, the notion that this fall’s flurry of interest rate cuts will send Canadians racing back to the shopping malls overlooks a rather sizable obstacle.
True, at 5.25 per cent the prime rate is now at its lowest level since 1959. But most homeowners with mortgages are locked into their agreements and face steep penalties—or outright refusal—if they attempt to renegotiate before the end of the term.
Although short-term and variable mortgages have gained slightly in popularity during the 1990s, five-year mortgages still account for 63 per cent of all loans insured under the National Housing Act. First-time buyers in particular—often, young families who would be more likely to spend rather than save any money gained from lower rates—tend to opt for the predictability of longer terms.
By the time many of those loans come due, there’s a very real danger that rates will have climbed back up again. Although economic forecasting is a notoriously inexact science, some analysts are warning that the prime rate could jump as much as 2lh percentage points by the middle of 1997 because of inflation pressures in the United States. And what happens if foreign lenders reawaken to the possibility of a separate Quebec? Today’s cheap money could easily become tomorrow’s fond memory.
For people worried about missing out on low rates, there are several things to keep in mind. First, it’s a common misconception that homeowners can wriggle out of their
By the time many existing housing loans come due, there is a risk that rates will have jumped again
mortgages at any time by paying three months’ interest. That applies only to terms longer than five years and mortgages insured by Canada Mortgage and Housing Corp. that have passed the three-year mark. In most other cases, borrowers are at the mercy of the lender.
With a CMHC-insured mortgage, it’s possible—though unlikely—that the interest saved by refinancing is worth the threemonth penalty. Another option is to check whether it is possible to extend the term, either by blending the old interest rate with the current rate or by paying an interest-rate differential, which compensates the lender for the additional money it would have collected between now and the time the original mortgage was due to expire. It’s a gamble, but refinancing can make sense if the mortgage doesn’t have long to run and the borrower is convinced that rates are about to rise. (If rates fall, of course, you’ll lose out.)
Bear in mind that the mortgage market is now extremely competitive and many institutions will bend over backwards to retain desirable clients. “If you’ve got other business with the lender, like RRSPs and other loans, go in and plead for special treatment,” advises Frank Clayton, a housing market analyst in Toronto. “If not, tell them you’re prepared to transfer that business over to them. Banks are big on relationships these days.”
Finally, consumers might want to keep their fingers crossed that Ottawa adopts a Canadian Real Estate Association proposal to require that lenders disclose, up front and in plain language, the prepayment terms available under their mortgages. Another, more controversial, CREA recommendation would force financial institutions to adopt, as a minimum, a standardized formula for calculating early payment penalties. Both ideas, now being studied by the Commons finance committee, would encourage borrowers in future to spend more time thinking about their prepayment options—and perhaps haggling for better terms—before signing on the dotted line.
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