YOUR CANADIAN MORTGAGE BROKER

The popular variable-rate product tied to prime that helped people buy a lot more house with more debt is going up too. The prime rate at the major banks, which tracks the Bank of Canada’s rate, is now at 2.75%.

But a funny thing happened as the Bank of Canada was raising rates. With much of the credit crisis seemingly behind us, the discounts on short-term borrowing are increasing as the cost of funds for banks also fall. Instead of borrowing at 100 basis points above prime, it’s now 70 basis points off prime.

At 2.05%, a variable-rate product today may look as attractive as ever, but the five-year fixed-rate closed mortgage is falling fast. It can now be had for a shade under 4%, says Rob McLister, editor of Canadian Mortgage Trends.

“Bond yields have fallen out of bed and nobody expected that,” said Mr. McLister, adding the spread between the five-year Government of Canada bonds and five-year mortgages is still large enough that the banks may reduce long-term rates even more. However, at about 4%, the five-year closed fixed-rate mortgage isn’t far off its record low.

Bank of Montreal senior economist Sal Guatieri does agree that variable-rate products have worked out better than fixed-rate mortgages throughout history, but says the tide may be turning.

“Given that the central bank has already raised rates a couple of times now and will likely continue to raise rates, it probably is a correct assumption to make,” says Mr. Guatieri, noting variable usually works in a declining interest-rate environment. “The next five years might not quite follow the past. You could probably argue it’s wiser to lock in now. It’s a close call.”