Canadian Mortgage Rates
Lock in now or stay variable
Mortgage rates in Canada are at historical lows, ranging from just over 2% for a variable closed 3 year rate to nearly 5.5% for a fixed closed 5 year rate (with 25 year amortization). It really pays to shop around as there is a wide variation between lenders and between terms.
Sometimes the cheapest rate is not always the best mortgage. You need to read the fine print and learn about the various options that are available to you. Can you double up your payments? Can you make a one-time large payment? What happens if you miss a payment? These are important questions as the answers can save you literally thousands of dollars over time.
How mortgage rates are determined
In Canada the mortgage rate that you are offered by your bank, credit union or other lender is determined by the Bank of Canada’s overnight lending rate. This is the rate at which banks will lend other banks money. From this rate your bank will determine what their Prime Rate will be. This Prime Rate is the overnight rate plus a certain percentage for profit. This Prime Rate is used to determine the variable rate mortgages that the lender will offer to retail clients (you and me).
Depending upon your credit history and the terms of your mortgage (number of years, variable or fixed rates, amount of loan, etc) your mortgage rate will be the Prime Rate plus or minus a percentage. This percentage is the lender’s profit margin and the amount required to take on the risk of you not paying the loan back.
Fixed mortgage rates are based more on the bond market. As such fixed mortgage rates rely on supply and demand issues in the market. In times of economic trouble most investors flee the stock market and look for the safety of government backed bonds. This lowers the yield that new issues of bonds pay (since more people want them they will still sell even with lower interest rates). When bond yields are low then mortgage rates head lower – minus the mark-up that your lender retains. The opposite is true as well. When the prevailing sentiment in the market is bullish (positive) then bond yields have to rise to attract investors (versus the stock market). When bond yields rise so to do mortgage rates.
The future
While no one can tell you with certainty where interest rates are headed it must be pointed out that the overnight rate is at one of the lowest points in Canadian history. The stock market has had a huge bull run since the financial crisis (which Canada weathered better than most nations). This would lead one to believe that mortgage rates are on the rise. To a certain extent Canada takes its cue from its largest trading partner to the South of us, and they are expected to keep rates low due to the housing crisis in the USA.
You would be wise to talk to your mortgage professional and get their take on where interest rates are headed. By switching from a very cheap variable rate to a slightly more expensive locked in rate you may in the long run make a huge savings as rates rise. Alternatively if you feel that rates will remain low for the rest of the year, you can hold off locking in until the fall. Whatever you decide be sure to read the fine print because the best mortgage is not just about the cheapest rate