A general perception is that a variable rate mortgage although less costly than a fixed-rate mortgage does inherently have a greater risk factor. However, increasingly more Canadians are bypassing the new mortgage rules and opting for risk attached bundled loans, including those considering mortgage refinancing.
Last year saw the differences between fixed rates and variable being relatively few, with as little as 0.2% of a percentage point. This resulted in Canadians viewing the situation as offering an advantage by accepting the risk attached to a variable rate. This was shown by more than 90% opting for fixed-rate mortgages. However, this circumstance has to all intents and purposes now changed, for three apparent reasons!
Fixed or variable?
- The differences between fixed and variable rates is increasing
- The lowest fixed rate available for a 5-year mortgage agreement has increased by 0.35% since Nov. 1, 2016; from a previous 2.09% to 2.44%.
- In the meantime, five-year variable rates have shifted in the opposite direction since the beginning of the year. Toronto is an example, with the best rate available with RateHub now quoted at 1.83%.
This is a differential that is already sufficient to provide in some instances significant material savings, whether related to new or mortgage refinancing.
The benchmark interest rate as determined by the Bank of Canada and which affects variable rates shows no indication of change. The central bank of Canada does appear to have certain misgivings regarding prevailing economic conditions in its domestic market but has not indicated that it will increase rates. For those considering mortgage refinancing, due to the prime rates being linked to the Canadian Bank’s benchmark rate, it’s not foreseen there will be pressure to raise variable rates.
The situation has been somewhat aggravated by the new federal rules making it more challenging for applicants to qualify for the generally accepted 5-year fixed-rate mortgage. It was decreed that from October 2016, borrowers opting for a five-year fixed-rate mortgage needed to pass a stress test.
There is an increase in bond yields which creates a rise in fixed-rate mortgages. With bonds being the primary financing cost of fixed-rate mortgages, lenders have passed these additional costs to their consumers. Contributing to the rising pressure on Canadian bond yields is the USA. Market, and investor anticipation that President Donald Trump will increase the inflation rate with public spending to stimulate economic growth.
At Mortgage Guys, we can help you find the best fixed rate mortgage option. We are prepared to find the best deals in the industry so that you can pay less to own your dream home.