Mortgage rates in Canada are at an all-time low, but should prospective home buyers lock in rates now or wait for rates to fall further?
Not by much, but rates will fall, according to several analysts, who cite the Bank of Canada’s policy, competition among lenders, seasonal factors, and the impact of the pandemic on the economy.
The competition to snag buyers rushing to take advantage of the lowest-ever mortgage rates, combined with pent-up demand after the pandemic limited new sales listings in the spring, has resulted in a competitive mortgage market. The lack of supply also accelerated house prices in most markets across Canada, with the exception of the Prairies, where price declines were exacerbated by oil industry woes and oversupply.
The Canada Mortgage and Housing Corporation, the country’s largest public mortgage provider, predicts that house prices will fall by double digits early next year as the pandemic weighs on the economy and jobs.
Other analysts predict a slowing of prices, though not as sharply as some predict, and more likely in condos than houses. However, they claim that borrowing costs will not rise significantly until the economy has recovered sufficiently.
What Factors Affect Your Canadian Mortgage Rate?
In Canada, there are three types of mortgage interest rates: fixed interest rates, variable interest rates, and a hybrid of the two. These mortgage rate selections will have an impact on how your rate varies over time. Certain criteria that your mortgage lender will consider will also effect your mortgage rate:
The status of the economy, both in Canada and abroad, is extremely important.
The funds that banks give out originate from depositors and investors in Canada and around the world. As a result, interest rates in these areas play a big role in funding costs. And these prices fluctuate for a variety of reasons.
Increased demand for money is a result of strong economic growth.
Strong economic growth is associated with higher interest rates, and weak growth is associated with lower interest rates. The reason for this is that when the economy is booming, more businesses desire to borrow money from investors to expand their operations. As a result, a mortgage lender must pay a higher interest rate to attract investors. When the economy is struggling, the opposite is true.
The global economy is significant.
Many Canadian banks take out loans from other nations, especially the United States. Also keep in mind that the financial markets around the world are interconnected. Interest rates in Canada are influenced by events in other countries. For example, in 2019, international interest rates dropped. In response, interest rates on five-year fixed mortgages in Canada fell.
Interest rates are influenced by the Bank of Canada.
Interest rates are also influenced by the Bank of Canada, primarily through changes in our policy interest rate. We may raise this rate if the economy is strong enough to keep inflation from exceeding our target. Similarly, if the economy is weak, we may need to cut our policy rate to protect inflation from going below target. Short-term interest rates are affected by changes in the policy interest rate. The prime rate, which is used by banks to price variable-rate mortgages, is one of these. Long-term interest rates can be affected by a change in policy rates, especially if individuals expect the shift to last.
In the past, money’s worth was degraded by high and fluctuating inflation. To counteract these impacts, investors wanted higher interest rates. Mortgage lenders’ funding costs have risen as a result of this. Interest rates have fallen and uncertainty about future inflation has decreased since the Bank of Canada began targeting inflation in the 1990s. As a result, funding expenses have decreased significantly.
What You Need to Know
- Although interest rates have consistently declined over the last few decades, variable mortgage rates have historically done better than fixed mortgage rates.
- In Canada, 5-year fixed mortgages are the most prevalent.
- The lowest potential mortgage rate is available with insured high-ratio mortgages, but you’ll have to pay for mortgage default insurance.
- Longer mortgage durations often have a higher interest rate than shorter mortgage terms.
- Although closed mortgage rates are cheaper than open mortgage rates, open mortgages allow you to make any number of principal prepayments without penalty.
Canada’s Most Popular Mortgage: The 5-Year Fixed
The 5-year fixed rate mortgage dominates the $1.2 trillion CAD in outstanding residential mortgages in May 2021, accounting for about $660 billion, or more than half of all mortgages in Canada. Five-year fixed-rate mortgages account for more than all variable-rate mortgages combined. The 5-year fixed rate mortgage is so common that the CMHC bases its mortgage stress test on the Bank of Canada’s 5-Year Benchmark Posted Rate.
Short Term Mortgages
Short-term mortgages have cheaper interest rates because the borrower will have to renew the loan more frequently. A short-term mortgage is one that has a term ranging from six months to three years. Renewing frequently means that their mortgage rate will be renegotiated more frequently and will be more closely tied to current market rates. Consider the difference between a one-year and a ten-year mortgage. If interest rates rise in a year, the 1-year mortgage will have to be renewed at a higher rate, whilst the 10-year mortgage will have the same rate for another nine years. Borrowers will be more vulnerable to interest rate swings in the near future, resulting in less certainty. In exchange, short-term mortgage rates will be lower.
Long Term Mortgages
Long-term mortgages, which can last up to ten years, provide greater peace of mind because the interest rate is fixed for a longer length of time. You won’t have to be concerned about interest rate changes in the near future, nor will you have to deal with mortgage renewals as frequently. If borrowers believe interest rates will climb in the future, a long-term mortgage allows them to lock in a rate today. In exchange for locking in your mortgage rate for a longer length of time, your mortgage lender will want to charge a higher interest rate.
However, just as a short-term mortgage has the risk of rising interest rates, a long-term mortgage has the risk of falling interest rates. For example, if interest rates decline in the following two years, a 10-year mortgage signed today will be unable to benefit from a lower rate.
Rates on mortgages and the pandemic
As the COVID-19 pandemic spread, central banks, notably the Bank of Canada, slashed interest rates immediately to cushion the effect. New mortgage rates, on the other hand, haven’t fallen much, and some have even risen. Why?
Keep in mind that the majority of your mortgage rate is determined by your lender’s funding costs. As investors got concerned, the cost of finance increased in the early days of the pandemic. Given the uncertainty, many people simply wanted to keep their money. As a result, traditionally cheap funding for lenders has slowed to a trickle. Even though the Bank of Canada’s policy interest rate was falling, this increased the funding cost.
Along with the federal government and other public authorities, the Bank of Canada has taken a number of actions to help financial markets function better throughout the pandemic. The purpose is to relieve financing market stresses so that lenders can continue to provide loans to individuals and enterprises.
Launching programs to ensure that lenders have access to the capital they require is one of these steps. Funding costs reduced as a result of these moves, and some mortgage rates on new loans began to fall.
Keep in mind that existing mortgages did not increase in cost as a result of the pandemic. They either have a set interest rate until the next renewal, or a variable interest rate that has fallen in lockstep with the Bank of Canada policy rate.
The amount you pay is also influenced by you and the conditions of your mortgage.
The amount of risk lenders take when lending to you is determined by your credit history and some of the features you choose for your mortgage. A higher interest rate signifies a higher risk.
Credit risk or repayment
For the lender, the most significant risk is that you will default on the loan. A high credit score might assist alleviate this fear by demonstrating to the lender that you’ve been responsible in repaying your debts. As a result, you may be eligible for a cheaper interest rate than people with a lower credit score.
You’ll need to get mortgage default insurance if your mortgage is worth more than 80% of the home’s value. However, because insurance protects the lender against default, you may be able to acquire a cheaper interest rate than if you went for an uninsured mortgage with a larger down payment.
Risk of rising interest rates
In Canada, most mortgage loans are renegotiated every five years, but they might last as little as six months or as long as ten years. The more frequently you renegotiate, the greater the chance that the new interest rate will differ from the old. Prepare to pay a premium for the peace of mind that comes with having your rate locked in for as long as possible.
Risk of prepayment
Prepayment risk is the chance that the lender may lose money if you pay off your mortgage early. This is because the lender will not be able to make as much money from the funds raised, especially if interest rates have declined since the mortgage began. As a result, a “open” mortgage, which allows you to pay off the entire loan early, has a higher interest rate than a “closed” mortgage, which restricts how much you can pay off early.
It is critical to shop around!
If you do your study and are prepared to bargain, you will almost certainly be able to get a cheaper interest rate. Keep in mind that you have a variety of lenders to choose from, including national banks, smaller regional banks, credit unions, and mortgage finance firms.