May 3, 2017 nkad3

How Mortgage Rates Today Differ From 10 Years Ago

Thankfully, mortgage rates today (even now in 2017) have remained historically low which is great for Canadians. Unless you’ve owned a home for quite some time, it may be difficult to understand what dictates Canadian mortgage rates today, and how any changes in rates impact the purchasing power of newer/future buyers.

Mortgages rates today are determined by either the Bank of Canada key rate (direct effect on Variable Rate), or the Canadian government bond (bond yield) (direct effect on Fixed Rate). To understand the historic trends in mortgage rates, one would need to understand the factors that influence the bond yield (domestic economic activity or foreign economic conditions) and when it comes to making market predictions, even the experts sometimes get it wrong.

Instead of wracking your brain, Here’s an easier way to understand mortgage rates today:

Mortgage rates today are dependent on what rate the bank is borrowing the money for vs. how much they are lending it to you for. In a variable rate mortgage, your rate is immediately impacted by any changes in the bank’s prime rate, and therefore your payment can increase or decrease based on current prime ANY time within the term. Should this happen, it will be no secret as you can check the validity of the Bank of Canada’s key rate 24/7. In a fixed rate mortgage, you’re secure with one fixed/guaranteed rate for as long as you have agreed to with the bank. Once the term (typically 5 years) is due, your rate is subject to change based on current rate offerings. Like the risk assumed by the bank in the products they lend, you can either benefit from the same risk adversity by choosing a variable term, or you can play it safe and choose a fixed term mortgage to ensure no future increases in payments.

Some worry that mortgage rates today, being as historically low as they are, will not last. Many say there’s a bubble which is bound to burst at any point. Mortgage rates today are impacted by many economic factors, but we should not assume that the housing market being as heated as it is, means trouble is around the corner. The hot housing market is currently the result of supply and demand. Demand is much higher than supply, and buyers are willing to pay a pretty penny to get those keys. There may come a point of separation within the industry where homes may not appreciate at an equal rate (ex. Townhome vs. detached), as income levels will be the ultimate roadblock in demand power. Nonetheless, if economic conditions (both domestic and foreign) remain the same, mortgage rates today will remain low as well. Other precautions are taken by the government to reduce the possibility of a market crash (ex. Stress test introduced in 2016), so it’s not an issue that’s being ignored. Keep in mind that ‘advertised rates’ posted by the bank are always changing, and that’s because margins on their portfolios are changing. This is an entirely different topic in itself, but the banking industry will usually change in harmony as competition is tight.

To sum things up, mortgage rates today remain low… historically low. When rates are low, it’s a good time to borrow money. If you’re less risk adverse, a fixed rate is right for you. If you’re more risk adverse, a variable rate will be best as the variable rates are lower.  In terms of trying to better understand mortgage rates today and the many factors that directly affect them… you’d better like finance and economics!

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