Not just variable: Fixed rate mortgages in Canada are on the rise,


You could pay up to twice the interest rate on a fixed mortgage compared to a variable mortgage.

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If you thought choosing a mortgage was going to get easier because variable rates tend to rise, well, maybe not.

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Shortly after the Bank of Canada announced that it was raising its key rate from 0.25% to 0.5% on March 2, variable rates received a slight upward push.

While some economists expect Canada’s central bank to raise the overnight rate four times this year, potential borrowers might think that a fixed-rate mortgage, which locks in your rate for years, might be the safest bet.

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But fixed mortgage rates are also rising.

Fixed rates attached to uninsured mortgages, those involving down payments of 20% or more, currently hover just above 3%. Six months ago, the average fixed mortgage rate in Canada was just 2.2%.

It’s not the kind of increase that will throw the world off its axis, but it’s still worth understanding, especially if you’re applying for a mortgage in the coming months.

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Why Fixed Mortgage Rates Are Rising

While the Bank of Canada’s overnight rate dictates the direction of variable mortgage rates, the country’s fixed mortgage rates are determined by activity in the government bond market.

Indeed, banks are major buyers of bonds and use projected returns from their bond investments to cover the costs and potential losses associated with their riskier mortgage business.

As the yield (or yield) on these bonds fluctuates, so does a bank’s ability to cover its fixed mortgage costs.

In the six months ending March 4, 2022, the yield on five-year Government of Canada bonds fell from 0.78% to 1.46%, according to Bank of Canada data.

The banks therefore raised their fixed rates to protect themselves against the relative instability of their bond purchases.

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What do higher fixed rates mean for your next mortgage?

According to mortgage analyst Robert McLister, every 0.1 percentage point increase in a five-year fixed interest rate leads to an increase in monthly mortgage payments of about five dollars for every $100,000 of mortgage debt. .

With fixed rates rising about 0.8 percentage points over the past six months, a $700,000 mortgage costs about $280 more per month now than it would have in September.

It’s hard to imagine the increase affecting too many current owners. Anyone nearing the end of a three- or five-year term will still find fixed rates lower than they originally signed up for, if they didn’t refinance when rates were at record lows. during the pandemic.

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“In fact, I don’t think most people who have fixed rates are going to have any trouble or trouble renewing, unless they’ve had employment situations or such things that would affect a normal qualification,” said Paul Taylor, CEO. Mortgage Professionals Canada.

If a borrower was able to refinance to a five-year fixed last year, there’s no need to even think about rates until renewal time in 2026.

Less purchasing power

However, anyone looking for a new fixed rate mortgage will have less buying power to work with. If this is the situation you find yourself in, you have a few options.

First of all, if the rate offered to you by your lender seems suboptimal, you can always ask for a better offer. The mortgage market is brutally competitive; most lenders will be flexible on the rate if it means closing a deal with a responsible borrower.

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When negotiating, Taylor says it’s important to keep in mind that the margins lenders earn on their loans are pretty slim.

“I wouldn’t be too aggressive,” he said. “But it never hurts to get your renewal out on the market.”

And if you’re offered a rate that’s right for you, locking it in with pre-approval can ensure it’s still available three or four months from now, even if fixed rates continue to rise.

Significant discount on variable rates

If you come from a long line of fixed rate fanatics, it might be time to consider an adjustable rate mortgage, if your budget allows.

If the Bank of Canada continued to raise the overnight rate to control inflation, you would also see your monthly payment increase. But many lenders offer variable rates in the range of 1.5%, or about half the rate of the average five-year fixed rate.

Four more 25 basis point increases in the overnight rate would still make you pay less than 3% interest on your mortgage. You would also have the option to terminate your variable mortgage at any time and pay a few months interest in prepayment penalties.

Higher fixed rates are by no means a positive development for Canadian home buyers. But on their own, they shouldn’t be enough to shatter your dreams of home ownership.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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