The financial world is a constantly evolving context, in which both economic factors and pure human emotion can enrich or impoverish the lives of millions. At present, the world financial markets are in a state of panic as the World's investors are extracting their funds from the marketplace, holding on to the denominator in which they trust --cash. As investors flea, money markets shrivel, and the financial world experiences the phenomenon we've all been hearing about: The Credit Crunch.
So what is the Credit Crunch?
When millions of investors extract their money from the market (over 2 trillion dollars), businesses become unable to secure funds for doing business. In the case of banks, investment firms, mortgage companies and the like, when they become unable to secure market funds for doing business, they are forced to search out investors who demand higher rates of return, and demand more oversight over the use of their funds. As the cost of funds increase for lenders, the costs of funds are passed along to borrowers. Increased costs, and more stringent guidelines mean less borrowers can qualify for loans and therefore less money goes into the market to again be borrowed and lent. As a result, credit continues to become more and more difficult to secure, and borrowing costs continue to go up until funds become available. Knowing this, central banks around the globe have made recent efforts, injecting what will end up being trillions ($24 billion and $700 billion in Canada and the United States alone, respectively) into the market and lowering prime lending rates in an effort to make lending money easier and cheaper once again.
What does all of this mean for the mortgage of the average prospective/existing homeowner?
As the availability of credit dries, fixed mortgage interest rates swell due to the increased cost(s) of lending. However, cash injections by central banks around the globe should help re-establish security in lending markets and hopefully limit further increases in fixed mortgage interest rates. Even with significant cash injections, I believe that fixed mortgage interest rates will continue to rise as lenders attempt to recoup 2007/2008 losses. In contrast, with prime lending rates dropping variable rates become increasingly affordable with one exception --most lenders are pausing, postponing, increasing or altogether eliminating variable rate mortgages from their product offering lineup. If you already have a variable rate mortgage at Prime - (0.00 to 0.90)% then I think you are safe, and will be enjoying what are and will be historically low mortgage interest rates as central banks continue to lower the Prime lending rate in attempt to bolster cash strapped economies. Those who have a variable rate mortgage should be in good shape --even while the road ahead may be full of bumps of anxiety. At the same time, many lenders are eliminating variable rate mortgages from their product line --therefore inhibiting many prospective/exisiting homeowners from taking advantage of potential Prime rate decreases in the near future.
Even with recent increases, fixed mortgage interest rates remain historically low. While fixed mortgage interest rates have increased by nearly 1% since August of 2008, they remain competitively priced, allowing for Canadians to comfortably afford the cost of credit. The market is still well capable of providing Canadians with the ability to afford owning real estate, and will continue to be among the leaders in the world financial marketplace in quality product offerings, consistency, and rate competition.
For more information about any of the above discussed mortgage topics contact one of the edmonton mortgage brokers at Alberta Mortgage @ (780)479-2222 or visit www.albertamortgagecentre.com.
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