Banks reduce variable rate mortgages.

Michael Kane
Vancouver Sun

March 3, 2004

Another cut in the bank rate is good news for homebuyers with variable rate mortgages, but increases uncertainty in the outlook for longer-term borrowing rates.

Most big banks dropped variable rate mortgages one quarter of a percentage point to four per cent Tuesday. That reduces the monthly cost of a $200,000 loan by $27 from $1,079 to $1,052.

Immediate changes in fixed mortgage rates are not expected because Tuesday's bank rate cut was widely anticipated and "priced in" by the bond market. However, we could see adjustments in the coming days if investors decide to sell off bonds in search of higher returns from equity markets, or to buy bonds as a haven from economic uncertainty.

The five-year bond rate rose a negligible 0.004 per cent Tuesday, to 3.48 per cent.

If investors sell bonds, that increases yields and puts upward pressure on fixed-term mortgages, which are financed on the bond market.

If investors choose bonds for safety, that lowers bond yields and lowers longer-term interest rates on mortgages.

Avery Shenfeld, senior economist at CIBC World Markets in Toronto, says lower interest rates will drive investors from the fixed-income market toward equities with higher dividend yields. In particular, he sees funds flowing to the financial sector, utilities and the more heavily indebted telecom stocks.

If that happens, it could mean higher rates on fixed-term mortgages, but it would be a mistake to bet the farm on that outcome. Often, fixed-term mortgage rates are increased slightly one day, only to be reduced by the same amount a few days later.

On Tuesday, the best available five-year fixed-rate mortgage was at 4.4 per cent. At that rate a $200,000 loan would cost $1,095 per month.

If rates went up one quarter of a percentage point to 4.65 per cent, the monthly cost would climb $28 to $1,123. If rates went up half a percentage point to 4.9 per cent, costs would climb another $28 to $1,151. Potential home purchasers can avoid rate worries by locking in a pre-approved rate for 60 to 120 days, depending upon the lender.

mkane@png.canwest.com
© The Vancouver Sun 2004