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AN AIR OF CHANGE

April26
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Recovering from a recession that led the mortgage markets to hit a surprising low last year, the Canadian market is steadily on its way to getting on its feet again. The beginning of the previous year saw attractive offers yielding lowest mortgage rates in decades, and with that, an era of “mortgage wars” came into motion, with every major bank decreasing its mortgage rate to a shocking low value in order to attract customers at a time of economic instability. This, in turn, drew significant business for moneylenders and resulted in a large percentage of the population borrowing a lot more than they could afford. This high rate of consumer debt may have adverse effects on the buyers in the long run. Analysts and experts are repeatedly advising the consumers that they should not borrow more than their needs because 2013 will be a year of change in the mortgage market and mortgage rates may considerably increase. The Bank of Canada, in a public statement, urged the fact that addition to the debt burden to Canadian households may be one of the highest domestic risks to the economy in the following year.

A SUDDEN ECONOMIC TURN OVER

Canada has been one of the first countries to recover from the economic downturn that resulted in the slowing down of economic markets globally. This turn of events has occurred almost a quarter earlier than anticipated and this recent return of the market to full capacity can have drastic effects upon the buyers and borrowers who had put their bids on a later date. Although a large number of consumers and buyers had opted for offers with locked mortgage rates, according to the Canadian Association of Accredited Mortgage Professionals, there is still a large population, constituting almost 31 percent of all mortgages, who will be directly affected by any sudden hike in the interest rate. This price hike will severely affect indebted customers and may result in an increase in bankruptcy, according to Laurie Campbell who is the executive director of Credit Canada. Not only the mortgages, but also the credit card debts been stacked up as people borrowed more and more money to avail larger loans that were offered on a low mortgage rate earlier. She said in a statement, “We have been hearing for so long that the mortgage rates cannot stay low forever. People will not take it seriously until they get their statement or see their mortgage go up. It is then that the chaos will reign.”  According to the Deputy Chief Economist of Bank of Montreal, Mr. Doug Porter, “The Bank of Canada will be raising rates before the economy reaches full potential, sometime in the first half of 2013 because it is clearly uncomfortable with the idea of keeping interest rates below inflation when household debt continues to grind higher.” However, some experts are of the view that such a drastic change in mortgage rates will not occur all of a sudden. The chief economist of the Toronto-Dominion Bank, Mr. Craig Alexander has clarified in a statement that the banks will not raise the rates to a higher level in one go, but the change will be simultaneous and will take into account the response of the market.

THE SITUATION IN 2013

The year 2013 is not going to be bleak for every buyer, according to the experts. There are a large number of consumers who have been suffering from low income or pension rates and the increase in the rates will be happy news for them. Savers will be happy and the brokers too will be benefiting from the increase in the mortgage rates after a long period of time when the figures remained at a historical low percentage.

A good option for Canadian house buyers to benefit from the low mortgage rate while reducing their household debt is to opt for mortgage offers that have a 25-year or less amortization period. This decrease in the lifetime of their loan will enable them to pay their mortgage sooner and save thousands of dollars spent on interest. The head of mortgage products of the Bank of Montreal, Ms Katie Archdekin, said in a statement, "Shortening the amount of time they carry a mortgage debt should be a priority for any homeowner. It saves thousands of dollars in interest rates over the life of the mortgage and ensures Canadians can begin building equity in their home sooner. For two years now, the Bank of Montreal has been encouraging home owners to take on a mortgage amortization of 25 years or less, as it is safer and more feasible on the pocket.”

FINAL WORD

Every potential home buyer should be looking for payment certainty in order to ensure a safe mortgage plan for the future. With the hike in mortgage rates visible in the coming year, consumers should opt for lock-in fixed rates as opposed to variable rates. In a recent report by Bank of Montreal, senior economists, Mr. Porter and Mr. Benjamin Reitzes have stated that, "Fixed mortgage rates will trump upon variable mortgage rates. While the decision ultimately depends on the individual, the low fixed rate combined with a shorter 25-year amortization will significantly strengthen household financial stability." A survey by Leger Marketing's online panel, Léger Web, confirmed that about 65 percent of Canadian buyers are now opting for lock-in fixed mortgage rates to enjoy financial stability and lower payback in one go. This was confirmed by Laura Parsons, mortgage expert of Bank of Montreal, that mortgage rate hikes are definitely on the minds of home buyers as they are now looking for alternate channels to ensure that the increase in the mortgage rates will be manageable for them.Therefore, it is necessary for every potential buyer to stress test their mortgage plan before opting for it. This is probably the only way that the experience of buying one’s home becomes both joyful and relaxing.

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