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 home ownership 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 corona virus 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 signaled 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

25-Year Amortization

Of course, you’ll need to factor in prepayment penalties and any fees associated with your new mortgage. In some cases, these can cost as much as 4% of the mortgage amount.[6] You can use an online refinance calculator to estimate your potential savings, or we’d be happy to connect you with a mortgage professional in our network who can help you decide if refinancing is a good option for you.

 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.

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?

1. Consider a Variable-Rate Mortgage

If you’re looking for the lowest rate possible, and you don’t mind the added risk, a five-year variable mortgage may be right for you. Even though the prime rate has held steady at 2.45% since April 10, lenders are gradually increasing their discount rates.[1] And interest rates are expected to remain low at least through next year.

2. Opt for a Closed Mortgage

Closed mortgages usually come with hefty penalties if you opt to prepay or refinance your mortgage before the term ends. However, they offer lower interest rates than convertible or open mortgages. It’s important to note that not all closed mortgages are created equal. Before you commit, make sure you understand exactly how much you’ll be expected to pay should you need to break your mortgage mid-term.

3. Give Your Credit Score a Boost
   You may have heard that the Canadian Mortgage and Housing Corporation has raised its minimum credit score requirement from 600 to 680. And while there are plenty of banks willing to lend to borrowers with a lower score, their best rates go to those with excellent credit. Unfortunately, there’s no fast fix for bad credit, but you can take steps to give your score a boost before you apply for a loan[7]:

• Dispute inaccuracies on your credit report.
• 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.

4. Make a Large Down Payment

You may be surprised to learn that the lowest advertised rates often go to insured borrowers who put down less than 20%. That’s because these “high-ratio borrowers” must pay for mortgage default insurance, which protects the lender from any financial loss. So while “conventional borrowers” who make a down payment of 20% may be charged a slightly higher interest rate, their total borrowing costs are lower because they don’t have to pay for mortgage default insurance.[8] A down payment larger than 20% can bring down borrowing costs even further.

          5. Shop Around

Rates, terms, and fees can vary widely among lenders, so do your homework. If you’re renewing an existing mortgage, start with your current lender. Then contact several others to find out which one is willing to offer you the best overall deal. But be sure to complete the process within 45 days—or else the credit inquiries by multiple mortgage companies could have a negative impact on your credit score.[9]

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.

Sources:

1. Canadian Mortgage Trends
2. Rate Hub
3. The Globe and Mail
4. Canadian Mortgage Trends
5. Mortgage Sandbox
6. Financial Post
7. Canadian Mortgage Trends
8. Integrated Mortgage Planners
9. Equifax

After months of reviewing the current mortgage stress test, our Federal Government announced on February 18, 2020 that effective April 6, 2020 there will be some changes. This change will be welcomed as the pendulum continues to swing in the direction of easing for homebuyers to enter the market after years of swinging in the opposite direction.

Here are what the changes are, what they will mean to potential borrowers:.

Currently:

Insured Mortgage Borrowers (those putting less than 20% down) must qualify at the Bank of Canada Benchmark rate which is 5.19% today.

Based on this most borrowers are qualifying at 5.19% which is typically 2.3% higher than the average contract rate of 2.89% offered on the market.

Changes:

As of April 6, 2020 these same borrowers will qualify at a weekly average of insured mortgage rates +2%. The qualifying rate will be reset by the bank of Canada each Wednesday and will be applicable as of Monday the following week. The rate will be determined using an average of all interest rates being submitted to the 3 insurance providers.

Impacts to borrowers:

Here’s an example of a borrower today vs. April 6

* estimating property taxes of $3,500 and potential maintenance fee’s of $400 per month

As you can see from the illustration above the expected impact is about a 4% increase to purchasing power.

Impact to Real Estate Industry:

1. An increase in purchasing power will often have an increase on the market, driving prices upwards. If borrowers are able to qualify for more, they are typically inclined to spend more on housing. This means that we may see additional growth in the real estate market in the coming months from both a price standpoint as well as increased numbers of borrowers. This is potently good news, especially those that may be considering selling in the near future.
2. Psychological Impacts: whenever there are rule changes there are impacts made to the psyche of the customer. Here we expect two:
• Excitement: the possibility of increased qualification and the ability to enter the market. This will spur a lot of inquiry and interest from those that have been interested but felt as though they were on the sidelines.
• Wait and See: this is a common impact of any rule change. Home buyers want to wait for the rule change to take place and see what their options are at that point . Based on the above point of potential market increase this may open opportunity for those ready, willing and able to enter the market today and not wait.

Looking forward to a great spring market!