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Mortgage Matters

Roma Luciw

Globe and Mail Update, Monday, Jun. 15, 2009 11:12AM EDT

The days of ridiculously cheap mortgage rates appear to be over. Now they're just cheap.

A sudden and dramatic jump in rates from Wednesday to Thursday means Canadians looking to break their existing mortgage and refinance at a lower rate may have missed the sweetest spot in recent history. But that doesn't mean people can't still trim their payments.

“We are not going to see these rates again for a while, not in the immediate horizon and maybe never,” says Gary Siegle, a Calgary-based manager at mortgage broker Invis. “But rates are still at historical lows. Depending on what your penalties are, there is still money to be saved.”

Toronto-Dominion Bank kicked off the hiking party, raising its five-year closed mortgages – the one of the most commonly chosen by Canadian homeowners – by a whopping 0.4 percentage points to 5.85 per cent on Wednesday.

That hike, its biggest in nearly a year, is on top of a 0.2-point increase unveiled last week by TD and several other big Canadian banks. Three other big banks followed in TD's footsteps and raised their posted rates in the last twenty-four hours, and other lenders are expected to follow suit.

With interest rates floating near generational lows, Canadian home owners who locked in last week may have been fortunate enough to negotiate a fixed-rate five-year mortgage as low as 3.65 per cent. “Clients who locked in during the last few months will enjoy the benefits of rates lower than any we have ever seen,” says Eric Iankelevic, a mortgage agent with mortgagebrokers.com in Toronto.

Although no one knows where interest rates are headed, the consensus is that they are unlikely to be this low again for a long time.

“These are really emergency interest rates but emergencies do not last forever,” says CIBC World Market economist Benjamin Tal. “I do think that interest rates will rise, I don't think it will happen in the very near future but three, four, five months from now they will be higher. Definitely a year from now they will be higher. And in two years, they could be notably higher.”

The stunningly low interest rates have led many Canadians to break their existing mortgage and get in at a lower rate. Mortgage brokers say that despite the penalties associated with it, a massive chunk of their recent business has been refinancing existing mortgages. And despite the latest jump in mortgage rates, they don't expect that to change.

Kim Arnold, a mortgage consultant with Dreyer Group Mortgages in Vancouver, says with mortgage rate still well below their historical norm, it is still a good time to look at refinancing.

The decision to break an existing mortgage depends on the penalty, as well as how many years are left on the existing mortgage. It might, for instance, make more sense to break a mortgage with a year left on it as opposed to one with four years left.

“It is not always worth it,” Ms. Arnold says. “It depends on the lender and it depends on the penalty.”

Penalties for breaking a mortgage loan can be either the greater of three months' interest or the difference between the interest the bank could make on your mortgage as originally arranged versus lending money out at current rates. Most recently the so-called interest rate differential, or IRD, is the larger penalty and the one many lenders use.

All of this is specific to the lender and subject to negotiation. In some cases, banks will do a blended rate, which blends the existing mortgage with the lower current rate. At the end of the day, home owners may or may not end up paying less interest than if they had stuck with their current mortgage.

Mr. Iankelevic says some of the best deals out there are the variable-rate mortgages. Given that the Bank of Canada has said interest rates are likely to remain unchanged until the second quarter of 2010, a variable rate can provide huge savings for home owners who can stomach a little risk.

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