Photo: James Bombales
Canada’s mortgage market has been turned upside down, and it’s giving borrowers an uncommon advantage, a new report suggests.
“With long-term rates lower than short-term rates, home buyers have had a rare opportunity to lock in longer maturity fixed-rate mortgages at lower rates than if they had opted for variable rate mortgages,” writes Scotiabank Deputy Chief Economist Brett House, alongside senior research analyst Raffi Ghazarian, in a Global Economics Scotia Flash report.
Variable rate mortgages, which fluctuate, can be perceived as riskier given the potential for them to increase before renewal, something fixed-rate borrowers don’t have to worry about. Historically, big banks have typically offered lower rates for variable mortgages — but that’s not the case today.
As five-year fixed rates — the most popular type of mortgage in Canada — were tumbling towards variable rates as summer approached, one expert called the trend “very unusual.”
Now that the five-year fixed rates are lower, borrowers can secure a better rate for the next five years without taking on the risk of a variable rate.
Not every observer is on the same page about how the central bank’s monetary policy will evolve. But Scotiabank’s House is one of many who predict the next move from the Bank of Canada will be a cut to its policy rate, which influences the mortgage market and variable rates in particular.
“While the Bank of Canada lauded the role of lower rates in stabilizing Canada’s housing markets in its July 10 statement, the Bank will be relieved to see the deceleration in mortgage credit growth from June to July as it prepares to cut its target rate,” reads the new report House co-authored.
Pressure to trim the policy rate is mounting as the US Federal Reserve recently cut its interest-rate target. Canada’s central bank normally follows suit, sooner or later.
Already, borrowers are benefiting from lower mortgage rates compared to last year, when the central bank was still hiking its policy rate, which has remained at 1.75 percent since October 2018.
In a separate report published August 30th, BMO Senior Economist Robert Kavcic noted that five-year bond yields, which big banks use to fund mortgages, have been pushing lower.
As a result, five-year fixed-rate mortgages have fallen by close to 100 basis points since late last year.
“For someone shopping at the $750k level with 20% down, that’s either $70k more buying power or $300 per month in extra disposable income,” Kavcic writes.
“Also, Canadians who took out a five-year fixed mortgage four or five years ago, and were recently threatened by the prospect of having to reset into meaningfully higher interest rates, no longer have to worry,” he continues.