If Mortgage Rates Can Fall Through the "floor" of the Prime Rate...what Else is Under the Floor?
January 7th, 2009 Filed Under naaktbelgisch.com edit
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 isnt the lowest you can go. Theres 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 whats 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 Bankers Acceptance rate.
While prime is a set rate which is offered to a lenders best customers, the Bankers Acceptance is the rate which financial institutions use to lend money to one another. And its typically well below the prime rate. Look for the Money Ratessection of your favourite newspaper, and you can compare Prime with the Bankers
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 Bankers Acceptance rate: offering a mortgage rate of 1% over the 3-month Bankers 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 Ontario mortgage is an excellent option when interest rates are either dropping or stable. Not surprisingly, theyve 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, its worth taking some time to look beyond prime and explore whats under the floor in mortgage options!
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