Foreia!

LET’S start out by mak- ing it very clear that no One can accurately pre- dict interest rates.

This is not to say that we can’t analyze key economic and financial vanables to come up with a pretty good call on the direction of rates over the next few months. But people making mortgage decisions really want know where rates are going to be ewo or three years from now, and if f could accurately predict that £ wouldn’r be writing this col- umn. Rather I'd be sitting on a tax-free beach somewhere, far away from rain, floods, Gien Clark and the other nat- ural disasters that seem to be plaguing B.C. these days.

Having laid that ground- work to gain your confidence, let’s have some fun and try to guess where interest rates might be going and then look at what kind af mortgage deci- sions this might lead to.

Firsr of ail, we just had a quarter point increase in U.S. interest rates and we might see another quarter or half'a point by end of the year if the hot US. economy doesn’t start to cool off. The Bank of Canada didn’t follow this U.S. increase bur it may be forced to follow future ones. Therefore we -- could be looking at a quarter or haifa point increase in mortgage rates this year. However that would be the maximum and it is by no

“means a certainty.

What abour the longer term? Well there are still con- cerns about future pressures

"on inglation and interest rates coming from the strong U.S.

- economy. On the other hand there remains a lot of econom- ic weakness around the world, notably in Asia, Furchermore, inflation is currently very much under control in Canada and there is still scope for

ing the

A economics

growth in the Canadian ccon- omy before inilationary pres- sures become a real threat. So while we might see some fur- ther increases in interest rates next year, they shouldn’r be big ones. In other words we . mighr see another half point or so increase in Canadian interest rates next year. Beyond thar it is very hard to say, but with central banks everywhere keeping a close eye on infla- tion and with no signs of a boom in the world economy on the horizon it is hard to imagine inflation wind interest rates really taking off.

So where docs this leave you if you ha + to make a decision about your mortgage? Well first of all Iet’s consider the person who is taking out a new mortgage. I like to tout the advantages of taking short-- er term mortgages because this strategy will usually save you © money. In the last 20 years there have only been two or three years when you would have been better off having taken a five year term instead of a one year term mortgage. The other reason that I like 10 point out the advantages of shorter term mortgages is that nobody else ever does. Most ienders promore che benefits of longer term mortgages, although whether it is the bor- rower it the lender who really benefits is an open question.

it is true that there is some risk of interest rates increasing over the next year which | would suggest that taking 2

Fi

holes Brod Lodw

longer term would be the pru- dent coune of action.

On the other hand there is currently a wide spread berween the one year and tive year mortgage rates. The post- ed one year rate at the end of June was 6.75% and the five year rate was 7.70% — a differ- ence of 95%. A couple of months ago the spread was only .65%, With the current spread, if you took five consec- utive onc year terms for a $100,090 mortgage and sates didn’t change over the five years, you would be ahead by more than $5,060 as com- pared to someone who took a five year term.

The other point I would like to make about current interest rates is that they are pretty darned high, contrary to what some lenders will wry to tell you. Sure nominal rates (the posred rates) are lower than in past years but real interest rates — the difference berween the nominal interest rate and the rate of inflation — are not low. With the annual rate of inflation running at only about 1%, the real interest rate on five year mortgages is about 6.7% which is high y historical standards. To put it another way: back when you were paying double digit inter- est rates, the value of your home was also going up by double digits. So on a $300,000 mortgage you might spend $12,000 on interest payment in a year but the value of your $200,000 home would go up by $26,000. Therefore at the end of the year you were ahead of the game. Now you are paying $6,006 or $7,C00 interest a year and the price of your home is going nowhere.

So next time your friendly banker tries to tell you how fow his interest rates are, just toll him real rates are high and yout want 2 fill point off his

posted rate.

1 do recognize there is a tisk involved in the short term strategy. fnitercst rates jump significantly you cot .d be fac- ing much higher monthly pay- ments. This doesn’t happen very often out it is always a possibility and as a result many people prefer taking terms of five years or even longer. I’m sure in the fina? analysis you will ignore my advice and do what you are most comfort- able with and, indeed, that’s what you should do.

If you are already locked into a mortgage and you arc worried about higher rates, what options do you have? Well many lenders will let you

Friday, July 9, 1899 — North Shore News — 51

future with morigage renewa

go for an early renewal. Let's suppose you have a year left on your mortgage at a rate of 6%. Ifyou are teartul char interest rates may take a big jump in the next year you may want to renew early and extend your mortgage to five years again In doing this, the lender would blend your 6% rate with the current rate you negotiate with them. In this case you would have a year left at 6% and 4 vears at say 7%, so the blended rate would be 6.80%. A variation on that option is what is referred to as “blend and extend.” This would be of interest to someone who has quite a bit of equity in their home but needs some cash for

home renovations, a trip, a new wife or whatever. You increase your mortgage, which results in a cash payment to: you, and ar the same time renew ‘or a new five year term. The lender will calculate the | rate you will be paving by blending your current rate with the new rate, raking into account how much time you had left in your morrgage term and how much you are adding to the mortgage.

~— Trent Appelbe is an econ- omist and a real estate agent with Sutton Group - West Coast Realty. He can bs reached at &38-7822 or by e-mail via his Web site at <wwwhomes-vancou- vercom>.

] ® cy _ : . Swingin’ summer sounds .- THE David Phyall Trio played to an attentive crowd at Lonadais Quey last Sunday.

The show was part of the quay’s Summer Festival, in conjuncticn’ with the du Maurier Jazz Festival. Sunday concerts will take place there throughout the summor,

Feature Listing 1528 Errigal Place _

AT A GLANGE...

CC ewe cere eretee nena ee DeEenesesECee Ree reeee

AODRESS: 1528 Errigal Place

ere rrr

LOT SIZE: 13,498 SC..FT.

Pere we rar eerenser er ooreesreveresenescestig

INTERIOR SIZE: 6373 SO. FT.

Ceserereocses

NUMBER OF BEDROONIS: 5/6

Pre ree Seer errr

NUMBER OF FLOORS: 3

COR eer ear esrers rece seseseeneeesonneoesseee

ASKING PRICE: $2,388,000 OPEN HOUSE: Open By Appointment LUSTING AGENT: Karim and daneef Virani 551-50 | SPECIAL FEATURES: Unraralleled view, . child-safe cul-de-sac, private gated driveway.

evesseovceesces

Mediterranean Spiendor! —

home room,

pool, in- Ses

” Karim end Haneef

Breathtaking, unobstructed city and ocean view. Custom built contemporary 5/6 bedrooms, 7 baths with over 6,300 sq.ft. Features include, dramatic vaulted entrance, custom water fountain, handpainted murals, sandstone fireplace, mapie flooring, blue pearl granite, Spanish terra cotta tiling, in-floor heat, air-conditioned, built in entertain- ment units, wok kitchen, theatre steam room, 16: 32 swimming

- video entry, - home sound and. paging system. True luxury!

ats

. Virani © tiemax Croat Realty