Mortgage season is upon us and 5-year fixed mortgage rates have dropped as low as 2.99%. What does this mean for you? Our friends at RateSupermarket.ca have crunched the numbers and show you just how much you can save.
Some great news for those on the market for a new home – you can now finance your purchase with a record low mortgage rate! Five-year fixed mortgage rates dropped this Monday, with some lenders offering as low as 2.99 per cent. It’s the lowest these rates have been since this past August, and there are significant savings for those who choose to lock in now.
How Much Could I Save?
To give you an idea of the potential savings, let’s calculate what your monthly mortgage payments would be with a 2.99 per cent interest rate.
First, let’s assume that you are buying a home for $378,000 (the average Canadian resale price, according to the CMHC).
Let’s also assume that you’re going to make the minimum required down payment of five per cent on your new home. This means you’ll need to take out default insurance (offered through CMHC or an independent provider like Genworth). This insurance is required on all home purchases with a downpayment less than 20 per cent.
Here’s what your final mortgage total will look like:
(Home value – down payment) + CMHC insurance premiums = final mortgage value
Home value: $378,000
Down payment: $18,900
CMHC insurance premiums (try their handy calculator): $9,875.25
Total Mortgage Value: $368,975
Now, let’s run this through RateSupermarket.ca’s Mortgage Calculator to find the monthly payment with a 2.99 per cent rate.
Monthly payment at 2.99% = $1,744
Now, let’s do the same with a rate of 3.49 per cent (the lowest big bank rate, offered by Scotiabank).
Monthly payment at 3.49% = $1,840
That’s a monthly difference of $96! Not only that, but you’ll save $1,152 over a year, and – get this – $28,800 over your full 25-year amortization. No small peanuts!
Why Do Mortgage Rates Change?
Why are such discounted rates available only some of the time? They are dependent on a number of economic factors, which can fluctuate dramatically.
To understand, let’s look at the two main types of mortgage borrowing in Canada – fixed and variable mortgage rates – and how they’re set.
Getting a fixed mortgage rate is like signing a contract – your rate will be set in stone over the course of your mortgage term, despite what might be happening with the economy. That’s why getting such a rate is referred to as “locking in” – there will never be a surprise on your monthly mortgage bill.
A variable mortgage rate, by contrast, is set by the benchmark rate from the Bank of Canada. This means that if national economic factors push that rate up or down, your mortgage rate will change too.
Why Are Fixed Rates Dropping Right Now?
Rather than be connected to the central bank’s rate, fixed mortgage rates are determined by government of Canada bond yields. When these yields are low, it means high levels of investor confidence in Canada, and so banks react by discounting their fixed cost of borrowing. When yields are high, it means investors are uneasy about our economic climate – and banks make borrowing more expensive as a protective measure.
This most current round of fixed rate discounting is due to bond yields steadily sliding since the beginning of January. As of today, five-year bonds have a yield of 1.55 per cent, compared to 1.87 per cent four weeks ago.
What Happened Last Time Rates Dropped?
The last time we saw rates this low was last spring and summer, with the seasonally hot buying market in full swing. In fact, five-year fixed rates dropped to the lowest they had ever been in Canadian history – 2.62 per cent – in April.
There were a number of factors at play here. Such low rates were made possible by low bond yields, but the market was also reacting to new rules placed on buyers. That spring, the CMHC declared buyers making less than a 20 per cent down payment on their home purchase had only 25 years in total to pay off their mortgage (from 30 years). This meant buyers had to pay more up front, and faced larger monthly mortgage totals. This knocked a lot of would-be buyers temporarily out of the market, especially first timers.
As a result, the Canadian market “cooled” – and mortgage lenders upped the ante with lower rates to appeal to a shrinking buyer pool. In fact, things got so out of hand that federal Finance Minister Jim Flaherty stepped in with some disapproving words, calling lenders and chastising them for promoting Canadian household debt levels.
It still remains to be seen whether this rate drop signals such a market heat up – but buyers looking for future insight are wise to keep an eye on yields, and the direction they may go next.
Penelope Graham is the Editor of RateSupermarket.ca’s Money Wise, the personal finance resource that “Makes sense of it all”. In addition to providing a daily breakdown of current economic news for everyday Canadians, Graham has also provided commentary to publications such as the Globe and Mail, The Toronto Star, and MSN Money.
Read more, and find your best rate, at RateSupermarket.ca, Canada’s comprehensive and transparent personal finance resource.
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