The interest rate on Canada’s most popular mortgage, the five-year fixed rate, has fallen to its lowest level in history. In early June, HSBC made headlines when it began offering Canadians a five-year fixed-rate mortgage below 2%. Multiple brokers followed suit, and some are now advertising even lower rates.1 And while many Canadians have rushed to take advantage of this unprecedented opportunity, others question the hype. Are today’s mortgage rates really a bargain?
While discounted five-year fixed mortgage rates have hovered between 2% and 4% for the past decade, they haven’t always been so low.2 For a period of 18 years, from 1973 to 1991, the posted five-year mortgage rate never fell below 10%. At the time, the Bank of Canada was hiking interest rates to try to stem a rising tide of inflation. It’s hard to imagine now, but the five-year fixed rate peaked at over 21% in 1981.3 Fortunately for home buyers, inflation began to normalize soon after, sending mortgage rates on a downward trajectory that has helped make homeownership more affordable for millions of Canadians.
So what’s causing today’s five-year fixed rates to sink to unprecedented lows? Economic uncertainty.
Fixed mortgage rates move in sync with the yield offered on government-backed bonds.4 As the coronavirus pandemic continues to dampen the economy and inject volatility into the stock market, a growing number of investors are shifting their money into low-risk bonds. This increased demand has driven bond yields—and mortgage rates—down.1
Quantitative easing measures taken by the Bank of Canada are also helping to bring down mortgage rates. The federal bank dropped its overnight lending rate to .25%, and it continues to inject billions of dollars into the economy, giving financial institutions the confidence and ability to continue lending.1
HOW LOW COULD MORTGAGE RATES GO?
No one can say with certainty how low mortgage rates will fall or when they will rise again. But the Bank of Canada has signalled its commitment to keeping the policy rate at its effective lower bound of .25% for the foreseeable future, and many economists expect it to remain there through 2022.4
The real estate technology firm Mortgage Sandbox compiled forecast data from Bank of Montreal, Central 1, Desjardins, National Bank, Royal Bank, Scotiabank, and TD Bank. According to their analysis, the consensus was that the fixed 5-year mortgage rate will rise modestly over the next two years, averaging between 2.3% and 2.88%.5
While forecasts may differ, many experts agree: Those who wait to take advantage of these unprecedented rates could miss out on the deal of a lifetime. Positive news about a vaccine or a faster-than-expected economic recovery could send rates back up to pre-pandemic levels.
SHOULD I CONSIDER BREAKING MY CURRENT MORTGAGE?
If you have a variable rate or recently renewed your mortgage, you may already be enjoying the benefits of falling interest rates. But if you’re locked into a higher fixed-rate mortgage for the next several years, you’re probably wondering if it’s a good idea to refinance.
Reduced interest rates can save homeowners a bundle on both monthly payments and interest over the term of a mortgage. The chart below illustrates the potential savings when you decrease your mortgage rate by just one percentage point. When it comes to refinancing, the bigger the spread, the greater the potential savings.
Estimated Monthly Payment On 5-Year Fixed-Rate Mortgage
|Loan Amount||3.5%||2.5%||Monthly Savings||Interest Savings Over 5 Years|
HOW DO LOW MORTGAGE RATES BENEFIT HOME BUYERS?
We’ve already shown how low rates can save you money on your mortgage payments. But if you can meet the mortgage stress-test requirements,* they can also give a boost to your budget by increasing your purchasing power.
For example, imagine you have a budget of $1,500 to put toward your monthly mortgage payment. If you take out a 5-year fixed-rate mortgage at 4.0% amortized over 25 years, you can afford a loan of $285,000.
Now let’s assume the mortgage rate falls to 3.0%. At that rate, you can afford to borrow $317,000 while still keeping the same $1,500 monthly payment. That’s a budget increase of $32,000!
If the rate falls even further to 2.0%, you can afford to borrow $354,000 and still pay the same $1,500 each month. That’s $69,000 over your original budget! All because the interest rate fell by two percentage points. If you’ve been priced out of the market before, today’s low rates may put you in a better position to afford your dream home.
On the other hand, rising mortgages rates will erode your purchasing power. Wait to buy, and you may have to settle for a smaller home in a less-desirable neighbourhood. So if you’re planning to move, don’t miss out on the phenomenal discount you can get with today’s historically-low rates.
(*This scenario assumes you can meet the current mortgage stress-test requirements.)
HOW CAN I SECURE THE BEST AVAILABLE MORTGAGE RATE?
The best mortgage rates are typically reserved for only highly-qualified borrowers. So what steps can you take to secure the lowest possible rate?
- Consider a Variable-Rate Mortgage
- Opt for a Closed Mortgage
- Give Your Credit Score a Boost
? Pay off debt, or spread it across multiple credit facilities.
? Charge small amounts and then quickly pay off any dormant credit cards.
? To lower your utilization rate, pay your credit card bill before the statement date.
- Make a Large Down Payment
- Shop Around
|READY TO TAKE ADVANTAGE OF THE LOWEST MORTGAGE RATES IN HISTORY?
Mortgage rates have never been this low. Don’t miss out on your chance to lock in a great rate on a new home or refinance your existing mortgage. Either way, we can help.
We’d be happy to connect you with the most trusted mortgage professionals in our network. And if you’re ready to start shopping for a new home, we’d love to assist you with your search—all at no cost to you! Contact us today to schedule a free consultation.
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.
1. Canadian Mortgage Trends - https://www.canadianmortgagetrends.com/2020/06/mortgage-rates-keep-setting-new-record-lows/
2. Rate Hub - https://www.ratehub.ca/5-year-fixed-mortgage-rate-history
3. The Globe and Mail - https://www.theglobeandmail.com/real-estate/the-market/remember-when-what-have-we-learned-from-80s-interest-rates/article24398735/
4. Canadian Mortgage Trends - https://www.canadianmortgagetrends.com/2020/07/bank-of-canada-hints-at-no-interest-rate-hikes-until-2023/
5. Mortgage Sandbox - https://www.mortgagesandbox.com/mortgage-interest-rate-forecast
6. Financial Post - https://business.financialpost.com/moneywise/with-mortgage-rates-bottomed-out-its-time-for-homeowners-to-take-advantage
7. Canadian Mortgage Trends - https://www.canadianmortgagetrends.com/2020/02/five-tips-increase-credit-score-quickly/
8. Integrated Mortgage Planners - https://www.integratedmortgageplanners.com/blog/first-time-home-buyers/canadian-mortgage-rates-explained-why-a-smaller-down-payment-comes-with-a-lower-mortgage-rate-tuesday-morning-interest-rate-update-may-23-2017/
9. Equifax - https://www.consumer.equifax.ca/personal/education/credit-report/understanding-hard-inquiries-on-credit-report/