Variable rate may no longer win!

Not that there are a lot of people buying houses these days, but the answer to the age-old question of whether to go long or short on your mortgage is unclear yet again.

The Bank of Canada’s second quarter-of-a-point rate increase in the past two months is likely not going to do much to boost a real estate market that saw sales drop almost 20% across the country in June from a year ago.

The popular variable-rate product tied to prime that helped people buy a lot more house with more debt is going up too. The prime rate at the major banks, which tracks the Bank of Canada’s rate, is now at 2.75%.

But a funny thing happened as the Bank of Canada was raising rates. With much of the credit crisis seemingly behind us, the discounts on short-term borrowing are increasing as the cost of funds for banks also fall. Instead of borrowing at 100 basis points above prime, it’s now 70 basis points off prime.

Source: Financial Post
By: Garry Marr
Tuesday, Jul. 27, 2010

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