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MORTGAGE ARTICLES
If mortgage rates can fall through the "floor"
of the prime rate…what else is under the floor?
“Lower than prime,” you heard someone say. Like
most Canadians, you were probably first skeptical and then confused. We tend
to think of the prime lending rate as the invisible “floor” of
lending rates. The very best customers can get very close to that floor. It
is theoretically possible, we reason, to actually be ON the floor, but not
possible to be below it.
Nevertheless, Canadian lenders offer mortgages at prime minus
0.5% to even minus 0.7%. So the floor isn’t the lowest you can go. There’s
something under the “floor”. The rate known as “prime”
has been the popular benchmark for lending in Canada. When business reporters
talk about interest rate movement, they usually talk about what's happening
with prime. But there are other benchmarks in money rates, though they are
typically for use by professional money managers. The most significant of
these is the Banker’s Acceptance rate.
While “prime” is a set rate which is offered
to a lender's best customers, the Banker’s Acceptance is the rate which
financial institutions use to lend money to one another. And it’s typically
well below the prime rate. Look for the “Money Rates”section of
your favourite newspaper, and you can compare Prime with the Banker’s
Acceptance rates for yourself. “Interesting,” you think, “but
why does it matter?” Well, as new lending institutions begin to offer
a slate of innovative new loan options, a new mortgage has emerged that is
based on the Banker’s Acceptance rate: offering a mortgage rate of 1%
over the 3-month Banker’s Acceptance.
If you compared the rock-bottom prime-based variable mortgage
rate – prime less 0.5% to 0.7% – with the new adjustable BA-based
rate, you would find that the BA-based rate would have delivered significant
savings over the past several years, as rates were dropping. There are two
reasons for this. Firstly, the BA-based rates have historically been considerably
lower than prime. Secondly, the prime rate tends to be “stickier”
in an environment where rates are falling. Often, the more fluid, market-based
BA rates deliver the rate change more quickly.
Any variable- or adjustable-rate mortgage is an excellent
option when interest rates are either dropping or stable. Not surprisingly,
they’ve been a very popular choice in the past few years. There are
some rumblings now that rates may begin to increase, but flexible-rate mortgages
still remain an excellent choice for those looking to save some interest.
As always, you should consult with a mortgage professional
to find the mortgage that suits your personal financial needs. An independent
mortgage broker can provide you with information on a broad range of mortgage
options from a wide variety of lending institutions, so you can compare features
and options at a glance.
And remember, it’s worth taking some time to look beyond
prime and explore what’s “under the floor” in mortgage options!
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