Record-low interest means now is the perfect time to buy a home - if your credit is good enough

Six months ago, before the credit crunch bit and risk became a cutting four-letter word, obtaining or renegotiating a mortgage was pretty much a formality.

It's harder now. Financial institutions haven't necessarily changed their lending criteria for mortgages, but they do apply them more strictly. "Grey-area" borrowers who would have received the benefit of the doubt a year or two years ago may need to apply several places now before finding a taker.

The doors are still wide open, though, for clients with a steady income, significant assets and/or a solid credit history. They are, in fact, the object of keen competition between lenders, and as such are in an excellent bargaining position in what is normally the biggest month of the year for mortgage transactions.

With interest rates near historic lows, housing prices plateauing, and both the provincial and federal governments offering tax incentives for renovation and higher RRSP withdrawals for home purchases (now a maximum of $25,000 per person), a compelling case can be made for buying, or converting existing home equity into cash, now.

That's provided you feel secure enough about your own situation, the overall economy and resiliency of the real-estate market to take the plunge.

Apparently, many people still do. In RBC's annual home ownership survey, conducted in January, 22 per cent of Quebec respondents said they intend to purchase a home over the next two years, up from 21 per cent in 2008 and 19 per cent in 2007.

But York University professor Moshe Milevsky, who has written extensively about mortgages, cautions that "there are a number of factors that one should take into account when choosing a mortgage, or buying a house, that were non-issues a few years ago - security of career and job, an ample down payment, liquidity concerns. They should all be part of your financing decision."

This week's half-point reduction of the Bank of Canada's key overnight rate to a record low of 0.5 per cent led to a drop in the banks' prime lending rate to 2.5 per cent, which in turn resulted in lower borrowing costs for variable-rate mortgages (though fixed-term mortgages did not move).

Variable-rate mortgages, which are linked to the prime rate, now carry interest rates as low as 3.30 per cent. Rates this low are a huge boost to housing affordability. In mid-2007, the posted five-year rate for fixed mortgages was 7.25 per cent; today, it's around 5.75 per cent, just .05 per cent above the previous bottom. (Most people are able to negotiate a significantly lower rate than the posted one). A variable rate with a five-year commitment is more than two percentage points cheaper today than in 2007.

"Both fixed and variable rates might slide a little more, but I sense we're near the bottom," said financial adviser Adrian Mastracci of KCM Wealth Management. "These rates merit a very close look for each situation."

Though the housing market has cooled in recent months as consumer confidence waned, there's been a noticeable surge in refinancing because of the low rates. Even with penalties (typically about three months' interest), it can make sense to switch lenders or refinance mortgages at the lower rates depending on the specific terms of your mortgage agreement.

While the superiority of variable-rate mortgages has been clear-cut over the last two decades, the story may be different in the next few years. In an economic report this week, the Desjardins group said the Canadian mortgage market has changed in the past few months because of the financial crisis and, as a consequence, "we must drop the time-tested assertion that a variable-rate mortgage is always the best choice."

Based on its projections, "fixed-rate mortgages currently appear to be the least costly," Desjardins said, in part because there's little room for any further discount for variable rates.

"As in all other recessions, the economy will bounce back sooner or later, and the Bank of Canada will have to bring its key rate up to more normal levels to keep an inflation spiral from developing," the Desjardins report says. If interest rates start moving back up in mid-2010, or sooner, the variable rate probably will prove more expensive, though it isn't a certainty, senior economist Mathieu d'Anjou wrote.

While no one can accurately predict how interest rates will move over a five-year period, Milevsky agrees we may be entering one of the rare times when fixed-rate mortgages are the better deal. According to his widely-quoted 2001 research paper, borrowers were better off going fixed only 12 per cent of the time. "Today, we might be in one of those scenarios."

Variable-rate mortgages usually have the option of being switched to fixed-rate without charge, with a simple phone call and signature. But that doesn't necessarily mean you'll get an advantageous fixed rate. Though the rate of interest won't be guaranteed, negotiating beforehand how it will be set may avoid unpleasant surprises.

D'Anjou cautions that borrowers who go the variable route "must make sure they are protected in case interest rates rise too steeply and they can deal with an increase in their mortgage payments. The financial situation and tolerance for risk of each borrower must be taken into account."