As the New Year approaches many Canadians are curious about what’s in store for their finances in 2012? For individuals considering borrowing money in the coming year, the timing is great!

On December 6th the Bank of Canada (B.O.C.) left the over night lending rate unchanged again. This overnight rate has been at 1% since September 2010 and doesn’t appear to be going anywhere soon. The B.O.C. consensus is that the global economy, in particular Europe and China, is expected to be weaker next year – and that should result in low borrowing rates.

In addition, the central banks have recently agreed to lower the interest rate at which they lend each other money by .5%, in the efforts to make borrowing easier. This is a very rare move on their part and only considered when economic stimulus is a must. The current Canadian financial systems is functioning relatively well, yet our economic growth is expected to be moderate in 2012 with inflation forecast to decline. Keep in mind that the major pressure to increase interest rates is when inflation becomes a concern and exceeds 2% in any given year. Estimates are that inflation should not be a concern for another 2-3 years so that is great news!

The knowledge that interest rates are not likely to increase any time soon creates some interesting mortgage questions for 2012. Canadian consumers have been programmed by Banks to choose a 5-year fixed mortgage with little explanation as to why. Meanwhile, it’s financially responsible for mortgage clients to understand the new mortgage products and lenders recently introduced to the marketplace and available to them.

With no immediate pressure to lock in your mortgage, we are concluding a “convertible” mortgage may make the most sense for 2012. A “convertible” mortgage allows the consumer to change their mortgage to another term at anytime, with no penalties. This flexibility is paramount, allowing you to avoid being stuck with an unwanted mortgage.

As your Mortgage Planner, my responsibility is to ensure you know if and when to convert for free to a better mortgage term advice most Bank branches are not set up to provide. The most common “convertible” mortgage has been the 5-year variable mortgage (V.R.M.) that can easily be converted at any time, to a fixed mortgage term. The V.R.M. has had a very low interest rate until just recently.

In our opinion, today’s V.R.M.’s are currently over-priced. Over the past 10 years V.R.M.’s were typically priced at prime less .75%, while today the best discounts appears to be prime less .2% or 2.8%. The 1-year convertible mortgages is at about 2.85% and is a logical choice until fixed mortgage rates settle down, and V.R.M.’s become heavily discounted again in the future. As far as choosing a fixed term today, we would suggest that a 3-year fixed at 2.99% or 10-year fixed at 4.29% is more practical then a 5-year fixed at 3.29%.

The bottom line for 2012 is that it will be a good year to buy a property, renovate, or reposition your current obligations more efficiently. Difficult economic times require that Canadian consumers become more financially literate so that they can plan for a more prosperous future.

Happy Holidays,

Jay

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