Canada's Condominium Magazine
Last week, US mortgage rates jumped to their highest level since 2011: a 30-year fixed-rate mortgage would have cost 4.58 per cent as of June 28. But today the rate for the same mortgage dropped to 4.29 per cent. Since the 12-basis-point rise to 4.58 was described as a “surge,” the 29-basis-point drop must be at least a plunge, or a free-fall.
Which only shows that the mortgage market can be volatile when there is economic uncertainty. The rise and fall of US mortgage rates is being linked to the Federal Reserve and its $85-billion monthly purchases of bonds. But the average 30-year mortgage in the US—something Canadians no longer have—is still well below the ten-year average of 5.3 per cent.
Of course, any rise in interest rates has a big impact on the mortgagor’s monthly payments. And a rise can also affect the real estate market. Higher rates mean fewer first-time buyers qualify, and therefore fewer homes are sold.
In Canada, rates are moving upwards again. Both BMO and RBC have raised their rates lately, to 3.59 and 3.69 per cent respectively on 5-year fixed-rate mortgages. A few weeks ago, the same mortgage would have been available at 2.89 per cent. Today the lowest 5-year fixed rate available in Canada (according to Rate Hub) is 3.19 per cent. Considering that this mortgage would have cost about 7 per cent in late 2008, these rates do not seem unreasonable.
Consumers still have the choice of going with a variable-rate mortgage, of course. By far the majority of Canadians (79 per cent last year) prefer to lock in, but the banks do sell variable rates based on the possibility that the consumer “could save” thousands of dollars in interest costs. With a variable-rate mortgage, the rate you pay is tied to the bank’s prime rate: you pay the same amount each month, but if prime goes up, more of your payment goes into interest. If prime goes down, more of your payment goes to principal. That means you pay off the mortgage faster.
Given that the rates on variable-rate mortgages are lower—today’s best is 2.5 per cent—and given that prime does fluctuate, why do only about 10 per cent of Canadians go with the variable? One reason is that the spread between the fixed and the variable has been so narrow lately that the risk associated with a variable rate is less attractive. Also, more people today presumably believe rates will go up than down, and at this point in the cycle, that’s probably a pretty safe bet. Even a relatively modest rise could put the variable-rate buyer at a disadvantage.
Assume that two consumers take $400,000 mortgages today, one at 3.19 per cent fixed, the other at 2.5 per cent variable; we can see that the spread is not great to begin with, hardly worth the risk some would argue. If rates were to rise by just 0.75 per cent (75 basis points) over a year or so, the person with the fixed mortgage would be further ahead. A difference of even a few basis points on a mortgage of $400,000 could mean thousands of dollars in interest costs over the period of the mortgage.
There is also the reality that no matter what rate you actually get, you must qualify based on the banks’ posted rate. For a five-year, fixed-rate closed mortgage, that posted rate today is 5.14 per cent, more than twice the current rate for the cheapest variable-rate mortgage.
There could be a mini-surge in home sales as buyers choose to get in now before rates go any higher.