With the most recent interest rate announcement last week, and the knowledge that interest rates are set to remain low for the foreseeable future, the debate for variable rate mortgage over fixed rate has gained new momentum.

“With short-term rates now likely to stay at very low levels, and long-term rates testing record lows, whether to lock into a longer-term fixed mortgage rate or choose a variable rate continues to be a hot-button issue among home buyers,” says Benjamin Reitzes, Senior Economist, BMO Economics.

According to the Bank of Montreal, history would indicate that a variable rate is the way to go: “Research shows that there is little debate as to which has been the better option for homebuyers. Typically, borrowers save money by staying in variable products, and riding the rollercoaster of fluctuating rates. In fact, since 1975 the cost-effective route for borrowers was to stay variable 83 per cent of the time. And while the spread between 5-year fixed mortgage rates and variable rates has fallen from the all-time high hit in mid-2010, it remains historically elevated. “

Although, it is not as straightforward as one being better than the other, history aside.  And, as Karen Blomquist, Mortgage Broker, Mortgage Intelligence, told Propertywire.ca, it has a lot to do with matching product to person too. “I still believe that choosing between a fixed-rate versus a variable-rate mortgage has a lot to do with a person’s mind-set. I get nervous clients who went variable and then call or send e-mails every week. If you can handle a bit of risk, it’s great. But if you can’t, you should lock into a fixed rate, even if it is a bit higher.”

It is about lifestyle too, says Blomquist: “”You want to decide that if rates do land at 7%, you can handle it. After all, you need to be able to sleep at night.”

There is much to be gained too, into doing a little research, and knowing both your client- and your lenders too, as Blomquist suggests: “I definitely caution anyone looking at variable rate mortgages should check the lender’s “best rate” policies to ensure you can still get a discounted rate when locking in. “Not all banks offer it.” When working with a broker we can ensure that the lock in terms are that the client would get the lowest locked in rate and not the posted rate like some banks offer.”

And, too in the current rate environment, there exists tremendous opportunity to be proactive with clients who could benefit in the long term by refinancing or consolidating now: “Given the borrowing climate even those with a current mortgage may find it’s an ideal time to refinance, even if there are penalties”, she adds.

“Sometimes it will save you a lot of money in the long term. The results can be unbelievable when you crunch the numbers. I’ve seen some people save themselves $1,000 a month simply by moving to a 3.39% mortgage. If you do refinance, you might also want to consider rolling any consumer credit card debt into your mortgage to have a single lower payment.”

By Mark Weisleder

I am often asked whether a seller should agree to open houses when they put their home up for sale. Some say it helps the agent find new clients and does nothing to sell the home. Others say it is necessary to find the largest number of potential buyers. Which is correct?

In practice, there are two kinds of open houses. One is limited to real estate agents, so they can conduct research in the area and be able to recommend the right homes to their buyer clients. The second is open to the general public. This can include nosy neighbours who just want to see your home, buyers who don’t have nearly enough money to consider putting in an offer and even criminals who are there to either steal something from the home during the open house or check out the security system so they can come back later.

Open houses will lead to more exposure for your home and more feedback from potential buyers. On the other hand, since we have so much information available to buyers on the Internet, such as video tours of the entire home, wouldn’t it make more sense to wait for a truly interested buyer to schedule a private appointment to see your home? That shows more commitment.

Still, in a seller’s market, where there are more buyers than available properties, open houses are a good idea so the maximum number of buyers can see the property in a very short time period.

If you do agree to conduct an open house, here are some tips:

 • Make sure proper home staging is done in advance so your home appeals to the maximum number of potential buyers.

 • Do not stay in the house during the open house. You are more than likely to volunteer too much information, including why you are selling. This will hurt your negotiating position later.

 • Make sure your agent will be there the entire time.

 • It is not against the law to ask for identification in order to allow someone to enter your home. If they refuse to provide it, tell your agent to refuse them entry.

 • Sometimes criminals will come in pairs; while one distracts the salesperson, the other is going through drawers. If a lot of people are expected make sure your agent brings an assistant.

 • Ask your agent to check all windows and doors before they leave your home to make sure everything is properly secured.

 • Remove all valuables or store them in a safe, if you have one in the home. This includes your laptop and any discs that may have your personal information on them.

 • Keep all of your bank and credit card statements out of view, as this could lead to identity theft if someone takes them.

 • Take pictures of each room so you can check later if something is missing or damaged during the open house.

Whatever you decide regarding an open house, make sure you are properly prepared in advance.

By Sunny Freeman

The cost of home ownership in Canada rose for the second straight quarter, but recent global market and economic turmoil could actually help keep a lid on expenses by keeping interest rates low, RBC Economics reported Monday (PDF).

During the second quarter of 2011, the proportion of pre-tax income required to service the costs of owning a home increased for all types of houses measured in RBC’s housing affordability index. But that trend may turn around going forward, said Craig Wright, RBC’s senior vice-president and chief economist.

“Renewed turmoil in global financial markets has caused heightened uncertainty with respect to the pace of global growth and we need to factor this into our outlook for the Canadian housing market,” said

“However, this volatility might have a silver lining; housing affordability in Canada may not deteriorate as quickly or by as much as we previously expected.”

Plunges in stock markets around the world in recent weeks have been driven by investor fears that the global economy is slowing down and could even re-enter a recessionary period.

Such uncertainty, however, means the Bank of Canada will be in no hurry to raise interest rates in Canada, which helps keep variable rate mortgage costs down.

RBC expects that the central bank will now keep interest rates at the current low one per cent until the middle of next year. Earlier this year, economists had expected the Bank of Canada would start raising its key rates this summer.

“What is less transparent is the degree to which affordability will be affected,” Wright said.

“Our latest forecast had home prices hitting a plateau later this year and continuing into 2012. The postponement of interest rate increases might motivate homebuyers to stay active longer, extending the current upward momentum in prices and, in turn, acting as an element eroding affordability.”

Soaring expenses in Vancouver drove the entire national index higher.

The quarterly report said detached bungalows in Vancouver were especially expensive, with the cost of mortgages payments, utilities and property taxes equivalent to 92.5 per cent of a typical household’s monthly income.

That’s up 10.4 percentage points from the previous quarter.

The report says there’s growing evidence that the cost of home ownership is keeping local buyers out of the Vancouver market.

“Vancouver’s housing market is without a doubt the most stressed in Canada and is facing the highest risk of a downturn,” said Wright.

By contrast the measure for the second-most expensive major city, Toronto, was 51.9 per cent (up 2.0 percentage points) and the national figure was 43.3 per cent (up 1.7 percentage points).

Overall, the bank’s home affordability index dipped for the second straight quarter as home prices moved higher and mortgage rates increased.

However, the bank found that most local markets continue to be reasonably affordable, or at worst, slightly unaffordable, despite the increasing costs.

“By and large, the share of household budgets, taken up by the costs of owning a home at current market values, remains close to historical norms,” Wright said.

“However, extremely poor and rapidly eroding affordability in the Vancouver-area market is somewhat skewing the national picture.”

RBC’s housing affordability index measures the proportion of pre-tax household income that would be needed to service the costs of owning a specified category of home at going market values.

During the quarter, the cost of owning a condo rose 0.8 per cent, a detached bungalow cost 1.7 per cent more and a two-storey home was 1.8 per cent higher.

Meanwhile, it said Alberta is an attractive province for would-be homebuyers, as home ownership in Calgary remains very affordable.

In Montreal, home ownership cost about 42.6 per cent of a typical family’s pre-tax income, up 1.4 percentage points from the first quarter.

Other major cities in the survey include: Ottawa (41.2 per cent, up 1.3 points), Calgary (37.1 per cent, up 0.6 points) and Edmonton (33.8 per cent, up 0.6 points).

The Canadian Real Estate Association said last week that the average home price is expected to moderate in the second half of the year, returning to normal following a heavily skewed start to the year due to a surge in multimillion-dollar sales in selected areas of Vancouver and a higher than normal share of overall sales in more expensive markets.

Additional new listings should also result in a more balanced resale housing market in most provinces, with the national average price forecast to stabilize in 2012.

It forecast that the average home price will rise 7.2 per cent in 2011 to $363,500.

By Dana Flavelle

Canadian retailers say they welcome the opportunity to explain to a senate hearing why consumers pay more for some items in Canada than in the U.S.

The Retail Council of Canada was responding to federal finance minister Jim Flaherty’s call for a senate inquiry into complaints about the Canada-U.S. price gap.

“Canadians are rightly irritated when they see large price discrepancies on the exact same products being sold on different sides of the border,” Flaherty says in a letter to the standing senate committee on national finance.

Flaherty said he wants the committee to launch a study this fall in consultation with retailers, distributors, importers, wholesalers, and consumers.

Canadian retailers say prices are higher here because they face higher costs for things like import duties, transportation and distribution, and the prices charged by multi-national brand owners.

Flaherty said he would want the senate committee to study the role these factors play in pricing.

Prices in Canada are on average 20 per cent higher than in the U.S. though some items are much higher, according to a study last April by Doug Porter, deputy chief economist at BMO Capital markets

In a letter obtained by The Star, Flaherty told the senate committee he shares Canadian consumers’ “irritation” with a persistent price gap five years after the Canadian dollar hit parity with the U.S. greenback.

The price-gap problem resurfaced last month after popular U.S. fashion retailer J. Crew opened its first store in Canada and also its first Canadian website.

Fans of the clothing retailer were quick to point out J. Crew had raised its prices for Canada and added duties and taxes to its online prices. This made the final bill for some items 40 to 50 per cent higher than on its U.S. website.

J. Crew quickly backed down, removing the added duty from its Canadian website, though its prices both in the Yorkdale store and online remain 15 per cent higher on average than in the U.S.

Canadian consumers began complaining about the price gap in 2007 after the Canadian dollar soared above parity with the U.S. greenback for the first time in 30 years.

At the time, Flaherty responded by urging retailers to lower their prices and be more open about their pricing practices. He also suggested consumers shop around to ensure they got the best deal.

Canadian retailers said they felt unfairly blamed. They said prices in Canada are higher because they face higher costs here. However, no-one has provided a detailed explanation of how much these factors affect prices.

And, in some cases, retailers – including J. Crew’s CEO Mickey Drexler – have acknowledged they are charging whatever the market will bear.

The situation has improved since Flaherty last met with Canadian retailers five years ago to discuss this issue, he says in the letter. But many Canadians still have concerns with a persistent gap between some goods, the letter also says.

“We all want Canadians to shop at and support local businesses, especially with the start of the Christmas shopping season only months away. But we live in a market economy and Canadians know the value and power of shopping around. If we want our consumers to shop here, we need competitive prices,” his letter says.

“A strong dollar should benefit Canadian consumers,” the letter says.

It’s not just consumers who have noticed the price difference.

When BMO’s Porter first began tracking prices in 2007 they were 24 per cent higher in Canada on average.

Retailers said they needed time to adapt as most merchandise had been ordered 12 to 18 months earlier when the dollar was at 80 cents U.S.

Barbara Shecter

Canada’s big banks are raking in billions of dollars in profits, but if they want to keep doing it while the economy stumbles, look out for another boost in mortgage rates, analysts say.

Toronto-Dominion Bank announced Thursday that it earned $1.45 billion in profits during the fiscal third quarter, up from $1.18 billion in the same quarter last year. TD also boosted its dividend for the second time this year.

During the quarter, the six biggest banks in the country earned a combined $4.56 billion.

But all but BMO saw earnings drop in their capital markets divisions, the banks’ trading arms, thanks to volatility in the stock market. Banks are also likely to see lower revenues from their investment banking divisions as fewer companies do takeover deals or have initial public offerings when the economy and markets are in the tank, says analyst Brian Klock.

That, says Klock, means banks will be looking to boost earnings elsewhere, particularly in their retail banking divisions.

“I don’t think they’re going to be doing it by nickel and diming customers on their fees. The easiest way to do it is to raise mortgage rates,” said Klock, a banking analyst and senior vice-president at New York-based Keefe, Bruyette & Woods.

Klock said the other way banks can boost their bottom line is to pare their costs, something he sees TD as already having done.

“They have to look at controlling costs,” said Klock, who rates TD “outperform,” with a target price of $89 per share.

In a conference call with analysts to discuss quarterly earnings, TD CEO Ed Clark’s choice of words gave a hint of just how important the retail arm is to the company’s bottom line.

“We’ve got this amazing engine of growth in our Canadian personal banking business,” said Clark.

TD’s Canadian personal and commercial banking division posted earnings of $954 million for the quarter, up 13 per cent from last year.

Clark also added that the company is “excited” about its recent purchase of the Canadian credit card operations of MBNA, the largest MasterCard issuer in the country.

Last week, Royal Bank, BMO and CIBC raised rates on their variable mortgages, citing increased borrowing costs in the bond market.

That came as little surprise to Fred Lazar, an economics professor at York University’s Schulich School of Business. A bank’s borrowing cost may well be going up, said Lazar, but it’s tempting to tack on a little extra profit for themselves when raising the rate they charge customers.

“It’s not a one-to-one ratio. If the yields on five-year bonds go up 10 or 15 basis points, they’ll probably raise their mortgage rates 20 or 25 points,” said Lazar, adding banks are also making plenty of money from their credit card divisions.

“The spread between what they’re paying out on deposits and what they’re charging in interest is growing,” said Lazar. While banks often justify the rates they charge by saying credit cards represent a greater risk because they’re unsecured, Lazar says they’re not as risky as banks would have people believe.

Jamie Golombek, Financial Post