One in four home buyers is paying more than necessary each month because they haven’t reviewed their mortgages over the past two years, says Ben Tal, an economist with CIBC World Markets.

The five-year mortgage rate hasn’t moved dramatically over that period but it stands 2.5 percentage points lower than it was four years ago, while short-term mortgage rates have fallen by close to four percentage points since 2000. Those declines mean it could be worth refinancing your loan, even with penalties for early renewal.

CIBC research shows that almost one in two mortgage holders have refinanced during the past two years, saving close to $7 billion, or more than $4,000 per household.

Another 25 per cent of home buyers could lower their payments if they refinanced today, Tal says. However, a lot of people are not aware of this, or they just haven’t bothered to do anything about it.

A widely expected cut in interest rates today by Bank of Canada governor David Dodge will mean savings for borrowers with variable rate mortgages which float up and down with the bank prime rate.

There could also be some decrease in rates for short-term mortgages of up to one year, says Paul Mimms, vice-president of marketing and sales for CIBC Mortgages and Lending.

But longer term rates won’t necessarily follow Dodge’s lead because they are pegged to the bond market which has already anticipated a decrease in the prime lending rate.

In fact, bond yields moved a little higher in trading Monday, suggesting less chance of lower long-term mortgage rates, said Dean Marsland, a mortgage broker with Invis in Vancouver.

However, bond rates can turn on a dime and Tal says they have room to fall if the market anticipates another decrease at the Bank of Canada’s next rate fixing in June.

Much will depend on Dodge’s comments on the over-all state of the economy. Another rate cut is more likely if the outlook is bleak.

Widespread expectations of an interest rate cut knocked some strength from the Canadian dollar Monday with the currency falling by 0.50 cent to close at 74.87 cents US, at one point drifting as low as 74.59 cents.

The decline followed a 0.99-cent tumble last Thursday in the wake of a disappointing March employment report, in which the jobless rate rose one-tenth of a point to 7.5 per cent.

“I perceive that the economy is worse than people think,” Mimms said Monday. “Also, there is no real inflation, so there is no real reason to have higher long-term rates.”

Whatever happens to the prime rate, borrowers would be smart to revisit their mortgages not only because rates are very low but also because borrowing capacity has been rising with house prices and it makes sense to get higher-cost car loans or credit card debt refinanced at a lower rate.

“There may be penalties but you can often realize a saving,” Mimms said. “It may not make sense in all circumstances but at least visit your bank and have the conversation.”

Tal says housing prices have risen 40 per cent since 1997 and one in three borrowers who refinanced in 2002-03 also pulled more money out of their homes by increasing their mortgage principal by an average $28,000.

The widening spread between five-year and short-term rates has propelled a gradual shift into variable rate mortgages. Currently, variable rate mortgages account for 20 per cent of all mortgage debt in Canada, up from only eight per cent in 2000.

On a typical $200,000 mortgage over 25 years, Monday’s best available five-year variable rate mortgage of 3.25 per cent — three-quarters of a percentage point below bank prime — would set you back $972.33 a month, Marsland says. That will drop to $946.49 today if Dodge trims another quarter of a percentage point off the prime rate.

That means the floating rate borrower will save $327.19 each month over the typical posted five-year rate of 5.95 per cent which translates to a monthly payment of $1,273.68 on a $200,000 loan.

Variable rate borrowers risk higher payments if interest rates move up but will also enjoy further decreases if Dodge cuts again. As well, many lenders allow variable rate borrowers to lock into a fixed term at any time without penalty, although it may not be the best-available fixed rate at the time.

For those who want greater security, the best available five-year fixed rate at Invis Monday was 4.55 per cent from HSBC Canada, for a monthly payment of $1,112.51 on $200,000 amortized over 25 years. That could add up to significant savings for qualifying borrowers who haven’t looked at their mortgages for a couple of years or more.

© The Vancouver Sun 2004