Interest rates are definitely trending up. Each of Canada’s 5 big banks announced a series of rate hikes last week. While there were some differences in the details of changes made by the banks to their mortgage rates, the announced hikes put all their five-year fixed closed rates at about 5.84 per cent. That seems high in relation to what we have seen in the past year however, the average rate if we exclude the early 80s, is about 5%.

How high can the rates go?  Should you lock in a rate now or wait or stay variable?  If you ask the bank, they will likely tell you to lock in because it is good for them but before you do, consider a few facts and research made on the subject.

One of Canada’s foremost authorities on personal finance. Dr. Moshe Milevsky, studied over fifty years of mortgage rate data (1950 to 2001). He concluded that anyone who locked in at a fixed interest rate paid more than they should have for their mortgage. During the above noted period, you would have been better off with a variable rate 88.6% of the time.

Does a variable rate mortgage still make sense? With interest rates expected to head north, the natural instinct is to lock in, but you may be better off over the longer term with a variable rate mortgage.  Dr. Milevsky feels there is no “one-size-fits-all solution” to choosing a fixed or variable rate.  He says it depends mainly one’s risk tolerance. Milevsky’s mortgage research is the best out there. He has shown time and again that regardless of what rates do in 1-2 year periods you are better off in a variable if you can handle the payment risk.

That is key, can you handle the payment risk?  In a financial planning perspective, you need to assess your cash flow situation and personal circumstances.  Locking in a rate may be better for some to provide peace of mind while for most, the variable option may be the less costly alternative.

Interest Rates to Hold at Current Levels Until mid-2010 - Governor of the Bank of Canada Mark Carney says the central bank is committed to maintaining current interest rates through the first half of 2010, although he noted the challenge of resolving global imbalances stands in the way of convincing economic recovery. Speaking to the International Economic Forum of the Americas Conference in Montreal on Thursday, Carney discussed the recovery and rebuilding of the global economy. He noted that, “It appears likely that the global economy is entering a period of lower potential growth."It will take time to work off past excesses and to rebuild globalization, he said. Moreover, the composition of global growth will also shift, as the bank expects the U.S. recovery to be relatively mild, and emerging markets to play a bigger role. “The greater proportion of emerging-market growth in the overall growth of the global economy should create new opportunities, particularly by supporting commodity prices,” he said.He also stressed that policymakers must continue to try and restore market confidence, although that too remains a work in progress. “With U.S. banks now raising significant capital to cushion their losses, the negative feedback loop between the financial and real economies has been slowed, though not yet reversed,” he said. “More capital will be required globally; the toxic assets in core banks still need to be addressed; and a host of vital financial markets, such as private-label securitization, must be relaunched. As a result, stabilization of the global financial system remains a precondition for a sustainable recovery, both globally and in Canada.”

The Bank of Canada has slashed its key overnight lending rate by 75 basis points yesterday, to 1.5%.  The Chartered Banks’ new prime rate is 3.50%. Many Bank watchers had been anticipating a cut of just 50 basis points. 

“The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated,” the Bank said in a statement. “Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize.” The Bank said that the Canadian economy had unfolded as expected through the summer and early fall, and admitted that it is now following the rest of the world’s economies into recession.

Lower borrowing cost is good news if you have debts.  However, you may be surprise d to find out that credit cards have not lowered their interest rates and Home Equity Line of credit have only dropped by a fraction of recent cuts.  The spread banks now make between mortgages / HELOC and GICs is getting thinner.  Major Banks have reported that they can’t pass on the full reduction of recent rate cuts to the consumer.  New HELOC rates now range from prime +.5% to prime +1% currently from 4.25% to 4.75%.

Please note that if you have a HELOC in place you may be grandfathered the Bank’s prime rate of 3.5%.  Make sure to never close that grandfathered HELOC.  You may never be able to get prime rate again.