Choosing the right rate and term in this market
As the economy shifts and real estate pricing adjusts choosing the right rate and term in this market can make all the difference.
When you listen to the news about interest rates there can be some confusion. The media will typically talk about the Bank of Canada rate but that doesn’t represent what homeowners will actually pay.
Interest rates are available for fixed mortgages with terms of 1-5, 7 and 10 years. These rates are priced based on the bond market. As the bond prices drop the yield increases and the fixed rates rise. The Bank of Canada does not directly impact the rise and fall of the fixed rates.
Variable rate mortgages are available in a 5 year term. These mortgages are priced with a discount off the Prime Rate. That Prime Rate is set by lenders based on the Overnight Lending Rate which is set by the Bank of Canada. If the Bank of Canada increases the Overnight Lending Rate by .5% the Prime Rate will usually rise by the same amount. Lenders will offer a discount off the Prime Rate. For example if the Prime Rate is 5% and the discount is 1% the net rate will be 4%. As the Prime Rate changes the discount remains the same but the net rate will shift accordingly.
When the media talks about rates increasing or dropping they are typically referring to the Bank of Canada rate and therefore the variable rate mortgages. However, since they don’t provide examples or details many viewers will think all interest rates may be changing. In some cases they can move at the same time or at other times. However, they do move for different reasons.
So it is important when choosing the right rate and term in this market. Talk with your independent mortgage broker to gain some clarity and help you make an informed decision before you react to any media coverage about interest rates.
In addition to the variable or fixed rate pricing there are different pricing buckets that are set by lenders based on the government rules for different mortgage types and financing requirements.
Bucket One – best rates
There are insured mortgages for buyers with less than 20% down.
There are insurable mortgages for buyers with more than 20% down payment or homeowners with more than 20% equity if their home is worth less than $1M
There are uninsured mortgages for buyers who buy a home with more than 20% down and over $1M purchase price. Or who refinance their home with more than 20% equity.
Each one of these buckets come with different pricing and rates. If you see rates online those may be for someone buying a home with less than 20% down and that rate will not be available if you are buying a home over $1M.
Finally, higher interest rates don’t last forever. Locking into a 5 year term may back you into a corner and limit your options moving forward. A shorter fixed term or a variable mortgage may be a better solution short term. Alternatively, you can hedge with a longer term rate and evaluate the exit costs to see if that is a better fit for you.
Choosing the right rate and term in this market may make all the difference.
Reviewing needs and options with your independent mortgage broker is ESSENTIAL before you go too far down the road to a purchase, renew your mortgage or refinance your home.