With respect to Interest rates, it has been traditionally the case, that it is better to float your mortgage interest rate... that means select the variable rate (VRM).

The normal yield curve is positively sloped, with interest rates lower for short term maturities (1 to 2 years) and higher for longer term maturities (5 to 30 years).  When the economy strengthens, the Bank of Canada will raise short-term interest rates (they only have control over short term rates) and the base for variable rate mortgages (the prime rate) is moved higher.  This action signals a period of "tightening" of monetary policy to cool the economy and reduces inflationary pressures.

The triggers that determine longer term interest rates are bonds as they tend to move according to inflationary expectations.  If bond investors expect inflation due to economic growth, they demand higher returns (interest rates) as protection from inflation.  When the Bank of Canada is perceived as fighting inflation by raising short term rates, long term rates have a tendency, in most cases, to remain stable or improve because long term bond investors are content that inflation will not grow.

In other words, while sort term interest rates may go up, they will do so only until the Bank of Canada has slowed the ecomomy enough to curb anticipated inflation.  As economic growth slows the bank starts to lower the rates.  The yield curve will flatten ( with higher short-term interest rates) for a time but when the economy slows, short-term rates will go back down and the yield curve returns to its normal positive slope.

Over this time, variable-rate mortgages will move up to being approximately equal to locked in 5 or 10 year rates but that's followed by a period when they return to lower levels. More often than not, over this time, it is less costly to have held the variable rate debt.  Exceptions to this situation would be times of hyper-inflation when short term rates went to extreme levels ( like in the 80's).

If you have had a variable-rate mortgage over the past few years it's been a great ride.  Payments were low or if you kept them level then you were able to pay off a great deal of principal.

The economy is strengthening and short term rates will go up a bit over the next couple of years...but the feeling is that it will not be dramatic. The case for variable Rate mortgages remains strong.

For information on the Bank of Canada Rates Click Here.

    Deborah Gilmore...Your Trusted Source For Anything Real Estate!