Making sense of mortgage rates
By Diana McLaren • Bankrate.com

Calgary mortgage broker Trish Hart spends a lot of time these days explaining mortgage rate options to her clients. Gone are the days when "all a buyer wanted to know was, 'What's the lowest rate for a mortgage?' Today, borrowers are much more aware of the effect on the individual from what's happening at the macro level," she says.

That macro level came down to earth over the past year as Canadians saw people losing homes south of the border in the recent economic collapse. Suddenly, what was happening in Wall Street executive suites hit close to home in the form of foreclosures and tighter credit.

At the same time, interest rates are at historic lows for fixed- and variable-rate mortgages. Where does that leave you in deciding how to get the best deal when renewing your mortgage? Read on to find out.

Dramatic change in rates
Whether to lock in for a term of three to five years, or take on greater uncertainty with fluctuating rates -- that is the question. Two years ago, interest rates for fixed- and variable-rate mortgages were so close that borrowers didn't see much gain with floating rates against the security of locked-in rates.

That picture has changed considerably today.

Variable-rate mortgages are tied to the Bank of Canada's prime lending rate. That rate has fallen over the past two years as the government tries to stimulate the economy while holding the line on inflation.

However, because the prime rate itself has dropped so much, four percent within the past two years, the actual rate charged on variables has dropped from 5.2 percent two years ago to today's average of approximately 2.5 percent.

The five-year fixed-rate, which is tied to the bond market, was 5.75 percent two years ago, dropping somewhat to just over 5.5 percent at the end of last year. With more stability in the market, today's rate has fallen to an average of 4.29 percent.

Adding to the current attraction of low variable rates is the Bank of Canada's assurance that "conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010."

Canadians hesitate to take variables
With low rates and some guarantee they're slated to continue for the foreseeable future, it's hard to understand why the majority of Canadians opt for the higher-rate, fixed-term loans.

Rob Hafer, regional manager of mortgage brokerage Invis in Victoria, says uptake of variable-rate mortgages has doubled in the past two years. He estimates that today, it represents between 30 to 40 percent of borrowers, still a surprising minority of Canadians given the large rate differential.

"One of the reasons people take fixed-rate, even though currently the interest rate is much higher, is that they don't want to watch the markets all the time." It's what he refers to as the "sleep-at-night factor."

No guarantees
Even the Bank of Canada's commitment to hold the line on rates until mid-2010 is a conditional one, what Hafer calls a "quasi-commitment."