Tuesday’s decision by the Bank of Canada to hold the line on interest rates may be the last call for Canadians to make important decisions about their mortgage.

Those who wait until Governor David Dodge makes his move, most likely in the fall, will miss out on relatively low long-term mortgage rates.

Those rates increased by up to four-tenths of a point Tuesday as financing costs rose in the bond market where banks finance their mortgage lending.

With the Bank of Canada warning that higher energy prices will put upward pressure on inflation in the next several months, investors reacted by demanding higher interest rates in return for parting with their money.

CIBC announced that rates on one- and two-year house loans rose 0.4 of a percentage point, while rates on three- to five-year mortgages increased by between one fifth to more than one third of a point. The changes are effective today.

A one-year rate at CIBC rises .40 of a point to 6.85 per cent, while a three-year rate increases .35 of a point to 6.15 per cent, and a five-year rate a fifth of a point to 6.7 per cent.

The bond market has been driving mortgage rate increases for several weeks. For example, six weeks ago, the average discounted rate for the popular five-year fixed-rate mortgage was 4.72 per cent.

On Tuesday, the same discounted five-year rate was an average of 5.23 per cent. On a $150,000 mortgage, this increase means an extra $43.50 on the monthly payment, and an additional $2,610 in interest over the five-year term.

Also, with the higher rate, the borrower’s principal balance at the end of the term would be $1,067 higher.

With rates rising, borrowers have to measure their means when choosing between a fixed-rate and variable-rate mortgage, said Vancouver‘s Rob Regan-Pollock of Invis, Canada‘s largest independent mortgage brokerage firm.

For those borrowing below their means, Regan-Pollock recommends a variable rate mortgage with payments set as if they reflected a fixed-rate mortgage of between five and six per cent, in line with the prime rate average over the past decade.

“Even with rates rising, and they are expected to rise slowly, those people will have a buffer and they will still get ahead and reduce their principal.” he said.

“We are most concerned about people who are stretching to make their payments and have minimal equity, especially if they are planning children or changes in employment. For them, we would recommend a five, or seven, or even a 10-year fixed-term mortgage, where they know they can afford the payments and they don’t have to worry.”

Regan-Pollock cautions that longer term mortgage rates are likely to have stabilized at a higher level by the time the Bank of Canada increases the prime rate to which most variable rate mortgages are pegged.

“We would recommend that anybody looking to review their mortgage strategy contact their broker or financial institution now, just to make sure they know where they stand.”

For prospective buyers, or those with a mortgage coming up for renewal, it is possible to lock-in a rate today for up to four months. Prospective buyers who choose a three-year fixed term, or longer, will generally qualify to borrow more than those who opt for a variable rate mortgage.

Variable rate mortgages save money over time but borrowers have to be able to ride out any spike in interest rates.

© The Vancouver Sun 2004