Mortgage rates have reached record lows
Brokers say traditionally higher fixed-rate loans are competitive with riskier variable mortgages
When Canadians shut their doors against COVID-19 last March, the Bank of Canada had set interest rates at a record low.
Banks didn’t immediately pass along those better rates though and consumers, stuck at home pondering their financial prospects, were surprised to find that the lower cost of borrowing didn’t necessarily apply to them early in the crisis.
That has changed. Mortgage rates are so low now that brokers say that traditionally higher fixed rate loans are competitive with riskier variable mortgages.
That low cost of borrowing is helping push up home prices even amid unprecedented economic uncertainty, said Royal LePage CEO Phil Soper.
The Toronto Region Real Estate Board reported on Thursday that the average price of a GTA house or condo climbed 17 per cent year over year in July.
“Mortgage financing for ordinary Canadians is materially cheaper today than it was before the pandemic. It is a key driver in the recent spike in housing activity and property prices,” he said.
“People don’t buy homes based on their sticker price; they look at monthly carrying costs,” Soper said.
Estée Zacks, owner of Strategic Mortgage Solutions, says that monthly cost influences her clients’ choice of fixed or variable loans.
“Those who have priorities of the absolute lowest payment are going for variable if they can take the risk. Those who understand that grabbing a fixed rate that’s going to last for a long time is an advantage, are grabbing fixed,” she said.
When the Bank of Canada cut its overnight rate in March to the .25 per cent where it remains today, lenders “were unable or unwilling to follow suit” in the early crisis because they had to price substantial risk into their consumer products, Soper said.
“They had to guard against a sharp drop in the value of Canadian housing stock, and the potential that defaults would spike as a result,” he said.
As the market ramped up again, said Soper, competition kicked in for the banks driving retail mortgage rates lower.
Traditionally there is heightened competition among lenders during the
usually hot spring real estate season and rates have been declining as a result, said James Laird, president of CanWise Financial and co-founder of mortgage site RateHub.ca.
“We hit our record a couple of months ago and we’ve continued to move lower,” he said.
“We never went below two per cent before.
“The lowest we had was 2.09 per cent in 2016 during the oil crisis. Then we went to 1.99 per cent some time in June and now we’re below that. It’s the lowest we’ve ever been for fixed rates,” said Laird.
“You can get a fixed rate as low as 1.84 per cent, which is unbelievable,” he said.
The central bank has signalled that it doesn’t plan to raise its rates for at least two years but that doesn’t mean that consumer rates can’t rise in the meantime, said Laird.
“Bond yields and the Bank of Canada are closely correlated but not perfectly correlated so if you see bond yield rise, then you will see fixed rates rise.
Once the lender perceives the home buying market to be slowing they may remove some of the promotions that are in the marketplace right now. That’s always a factor — how aggressive are they feeling,” he said.
With a healthy real estate market in June and July, Laird said lenders “are putting their best foot forward to attract purchasers right now.”
Zacks said her clients “are stoked as anything because it’s 50-year lows.”
“Statistically over the last 50 years if the variable and fixed are 50 basis points or less apart, the fixed becomes a better idea. That means they are more likely to pay the least amount of interest for the five-year term,” she said.
Right now, the variable and fixed rates are about 20 points apart.
“The real lowest variable rate is about 1.7 per cent. People are generally get 1.8, 1.79, 1.75. On fixed they’re generally getting about 2.0 per cent or below,” said Zacks.
A report from Mortgage Professionals of Canada (MPC) this week suggests that the pandemic hasn’t shaken Canadians’ faith in the value of real estate as a good long-term investment. But there has been a slight contraction in their confidence about weathering a potential rise in interest rates. The online survey asked homeowners and renters — who hoped to buy in the next three years — if they “would be well positioned to handle a potential increase in mortgage interest rates.”
Respondents were asked to provide an answer on a scale of one to 10. The homeowners, who scored 6.39 out of 10 at the end of last year, dropped down to 6.11. Renters, a group that has suffered more from income loss during the pandemic, showed a greater decline from 5.94 on the scale, down to 5.34.
If low mortgage rates are pulling consumers off the sidelines, the low rates can also potentially make the choice between a fixed or variable mortgage more difficult, said Laird.
He cites variable rates as low as 1.65 per cent for high ratio mortgages, loans that apply to buyers with a down payment of less than 20 per cent.
If rates do stay low for the next year or two, Laird said, “Odds are, variable will save you money.”
Still, he said, “It’s not illogical to choose a fixed rate even though it’s a little higher. There’s a bit of insurance in having a fixed rate.”
The other loan category that the industry is watching are the existing mortgages that have been in deferral, said Laird.
After allowing customers to put off payments for up to six months during the COVID-19 crisis, lenders will be starting to look for payments this fall.
Canada Mortgage and Housing Corp. has suggested that home prices will suffer if mortgage holders can’t get back on track. Sixteen per cent of bankheld mortgages — 760,000 loans — have had deferred payments for up to six months, according to the Canadian Bankers Association (CBA).
The arrears rate of Canadian mortgages is usually less than 1 per cent. Of more than 2 million
Ontario mortgages, only about 1,900 were in arrears at the end of March — a rate of .09 per cent compared to .24 per cent nationally, according to the CBA.
“Even if one or two out of the 15 or 16 per cent (of deferred loans) aren’t able to pay that’s going to be a significant jump in the arrears rate,” said Laird.
Zacks acknowledged that as a part of the housing industry she has an interest in its success. But she said people are already starting to make payments again because they didn’t need the deferrals in the first place.
Only five per cent of homeowners who responded to the Mortgage Professionals Canada anticipated great difficulty in making their mortgage payments in the future.
Laird stressed that a mortgage in arrears isn’t the same as a default. If a homeowner is struggling, a lender will usually work to help get their payments back on track.
“They’re not in the business of taking homes and selling them. They’re in business of lending money,” he said.