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Tag: Variable rates

  • Variable mortgage rates regaining traction as Bank of Canada cuts rates – MoneySense

    Variable mortgage rates regaining traction as Bank of Canada cuts rates – MoneySense

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    Are more rate cuts likely?

    In announcing the rate cut Wednesday, Bank of Canada governor Tiff Macklem said if inflation continues to ease broadly in line with the bank’s July forecast, it is reasonable to expect further cuts in the policy rate. 

    Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, said clients with variable-rate loans were not happy when rates were rising, but the cycle is turning. 

    “We’ve lived the worst of it, we’re on our way out,” she said. 

    “So let’s look for the benefits and the benefit is, if they go variable and the rates go down, they’re going to live the benefit.”

    Right now, the rates offered to those looking for a new variable-rate mortgage or needing to renew are higher than those being offered for five-year fixed rate mortgages, something that Leduc called an anomaly.

    That’s because the expectations are that the Bank of Canada will continue to cut interest rates, lowering the amount charged to borrowers in the future. If something unexpected happens and the central bank doesn’t cut rates, then the rates charged on variable-rate mortgages won’t go down.

    What to expect if you’re mortgage holder

    But if things continue to roll out as expected, those choosing variable-rate loans will see the amount they are charged go down. Just how much and how quickly will depend on the central bank.

    Sojonky says the discounts lenders offer to the prime rate for variable-rate mortgages are also improving. 

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    The Canadian Press

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  • 3-year versus 5-year mortgage: How to choose your term – MoneySense

    3-year versus 5-year mortgage: How to choose your term – MoneySense

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    Whether or not a variable-rate mortgage is a good option for you depends largely on market fluctuations. Rates for this type of mortgage are typically lower than those of fixed-rate mortgages, which is a win as long as the prime rate doesn’t go up too much. And historically, they’ve tended to average out to lower payments over time. But the past few years have reminded Canadians that huge increases are possible, and home owners who signed on for a variable-rate mortgage pre-2022 have been waving goodbye to an extra several hundreds or thousands dollars every month for the past year and a half. For some, though, these increases are unmanageable and can lead to a potentially dire financial situation.

    What is a 5-year mortgage?

    A five-year fixed mortgage allows you to lock into a specified interest rate for a full five years. Just like with a three-year term, you don’t have to worry about changing markets affecting your payments for the duration of the contract. This is very appealing to home owners with less tolerance for risk—it’s a nice, long period of predictability. It also means much longer stretches between dealing with the headache of renegotiating. 

    Being locked in for longer, however, puts you in a less flexible situation. If interest rates drop, you won’t be able to take advantage of those lower rates—unless you decide to break your mortgage early, a decision that comes with hefty penalty. Or if your financial situation changes or you want to sell your property sooner than anticipated, that five-year commitment is a bit of a roadblock. 

    With a five-year variable mortgage, your payments will change according to the whims of the market. Usually, variable mortgage rates are lower, but since currently they will likely give home owners greater savings over their mortgage term, they’re higher than fixed-rate mortgages.  

    Where are interest rates headed? 

    The soaring interest rates of the past couple of years have been a significant stressor on millions of home owners and would-be home owners across Canada. While early 2024 has seen inflation cool, the prime rate, which is currently at 6.95%, has come down only slightly from its recent high of 7.2%. Economists expect June’s BoC interest rate cut will be followed by gradual decreases over the next few years. Most predictions suggest we’ll reach a full 1% drop by the end of the year with rates stabilizing at 5.2% by the end of 2027. Check out the latest rates.

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    Deciding on a mortgage term

    So, what does this mean when it comes to choosing a mortgage? If the predictions are accurate, a variable-rate mortgage is a great way to take advantage of the downward trend and save some money. Just be sure there’s enough room in your budget to cover higher payments should there be any rate hikes. Five-year variable mortgages are currently being offered at lower rates than three-year variable loans, which could make them the winning choice. 

    However, if any level of risk is the kind of thing that keeps you up at night, a three-year fixed-rate mortgage could be a better option—there’s no unpredictability when it comes to that monthly payment, and interest rates will most likely have decreased quite a bit by the time you have to renew. A five-year fixed may not be the best choice right now, as you’ll get locked into higher payments at a time when interest rates are going down. 

    Rate decreases aside, the decision largely comes down to your future plans—are you holding on to your property for the long term or do you want to keep your options open?—and your appetite for risk. Find your comfort zone and a plan that works for you.

    Read more about mortgages in Canada:


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    Ciara Rickard

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  • Making sense of the Bank of Canada interest rate decision on April 10, 2024 – MoneySense

    Making sense of the Bank of Canada interest rate decision on April 10, 2024 – MoneySense

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    Sentiment around the interest rate decision 

    The rate hold was largely anticipated by markets and economists. Many hoped it to be the central bank’s last hold before pivoting to a cutting cycle (lowering the rate, finally). Optimism around this has grown following February’s inflation report, in which the Consumer Price Index (CPI) clocked in at 2.8%, which is within one percentage point of the BoC’s 2% target. 

    However, the BoC itself seems less enthusiastic about this prospect. 

    The tone and language used in the announcement by the BoC’s Governing Council (the team of economists setting the direction for Canadian interest rates) clearly stated that inflation risks remain too high for comfort. 

    Why is the BoC holding its rate?

    This is due to steep shelter and mortgage interest costs right now, which are the largest contributor to the CPI. However, the council did note that the core inflation metrics the BoC monitors (referred to as the median and trim) have improved slightly to 3%, with the three-month average moving lower. This is notable, and likely the clearest signal the central bank may be preparing to cut rates—but the BoC needs to see more of this trend before it’ll make a downward move.

    Is inflation still too high in Canada?

    “Based on the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet,” reads the BoC’s announcement. “While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained.”

    The BoC also updated its inflation forecast, expecting it to remain at 3% during the first half of 2024, fall below 2.5% in the last six months of the year, and finally dip under the 2% target in 2025.

    As this marks the BoC’s sixth consecutive hold, there hasn’t been a change to the prime rate since July 2023. That means the cost of borrowing has sat at a two-decade high for the last nine months—and that certainly has implications for all Canadians. Here’s how you may be impacted, whether you’re shopping for a mortgage, saving a nest egg, or making an investment decision.

    How the Bank of Canada’s interest rate affects you

    What the BoC’s rate hold means if you’re a mortgage borrower

    First and foremost: If you’re a variable mortgage holder, you are the most directly impacted by the BoC’s rate direction out of everyone on this list. This is because the pricing for variable products is based on a “prime plus or minus” method. For example, if your variable rate is “prime minus 0.50%,” your variable rate today would be 6.7% (7.2% – 0.50%).

    As a result of this most recent rate hold, today’s variable mortgage holders won’t see any change to their current mortgage payments; those with “adjustable” or “floating” rates will see the size of their monthly payments stay the same. Those with variable rates on a fixed payment schedule, meanwhile, won’t see any change to the amount of their payment that goes toward their principal loan. All variable-rate mortgage holders—and those with HELOCs, too—will continue to experience stability, though these Canadians may be frustrated that the BoC continues to be coy around future rate-cut timing.

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    Penelope Graham

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  • Making sense of the Bank of Canada interest rate decision on March 6, 2024 – MoneySense

    Making sense of the Bank of Canada interest rate decision on March 6, 2024 – MoneySense

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    As a result of the latest rate hold, the prime rate in Canada will remain at 7.2%. This might not seem like big news, but this is what lenders, from the Big Five Banks to other financial institutions, use to underpin their variable borrowing product pricing.

    That the BoC would stick to the status quo was widely expected by market analysts and economists. A lower-than-expected January 2024 inflation reading of 2.9% took further pressure off the central bank, allowing it to continue its wait-and-see approach on rates. And, while the year-end gross domestic product (GDP) report came in hot, with a 1% uptick in the fourth quarter of 2023, overall lacklustre economic performance has made a firm case for ending the rate hike cycle. 

    However, the Bank provided no hints as to how long this holding pattern will last. In its announcement, while acknowledging that inflation has solidly declined from its June 2022 peak of 8.1%, the consumer price index (CPI) remains stubbornly above its 2% average with the core measures in the 3% to 3.5% range. (The core measures strip out the most volatile items, like housing and food costs.)

    In its announcement accompanying the rate decision, the BoC’s Governing Council—the panel of economists who set the nation’s monetary policy—made it clear that until sustainable progress is made with the CPI, the Bank of Canada interest rate won’t be going anywhere.

    “The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” states the Bank’s rate announcement release. “[The] Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.” 

    This fifth consecutive hold means key interest rates haven’t changed since September 2023. While that’s led to welcome stability for some, others are feeling the stagnancy. Here’s what the latest rate direction means for Canadians, depending on their financial interests.

    What the BoC rate hold means for mortgage borrowers

    Canadians with variable-rate mortgage terms are the most impacted group affected by the Bank of Canada interest rate hold. Their mortgage payments are based on the prime rate in Canada, as an extension of the overnight lending rate. 

    How the Bank of Canada’s interest rate affects you

    These borrowers in Canada have been walloped by the rate hiking cycle that took place between March 2022 and July 2023. Those with adjustable-rate variable mortgages—which have payments that fluctuate alongside the Bank’s rate moves—had payments soar by as much as 70%, according to the Bank’s own research. Those Canadians with fixed payment schedules, meanwhile, have seen the portion of their payment that goes toward their principal whittle smaller with every rate increase, with some Canadian borrowers even entering negative amortization on their mortgages.

    For all variable-rate borrowers, today’s rate stability offers some welcome relief, though they’re likely disappointed that the BoC didn’t offer a timeline as to when the rate will eventually decrease. And, Canadians shopping for the best mortgage rate, including those looking to renew, are also likely frustrated by the lack of movement. While variable rates remain frozen at last summer’s levels, fixed mortgage rates have seen some slight easing in recent months due to lowering bond yields.

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    Penelope Graham

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  • Buying pre-construction: What if your home is worth less than you paid? – MoneySense

    Buying pre-construction: What if your home is worth less than you paid? – MoneySense

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    What are your options if you find yourself in this situation? Let’s look at the intricacies of buying a pre-construction home in Canada, why some buyers are having difficulty closing on their purchases, and steps you can take to avoid losing a large deposit.

    You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote*You will be leaving MoneySense. Just close the tab to return.

    How does buying a pre-construction home work in Canada? 

    Generally, pre-construction homes offer several key benefits. For one, the property is brand new. Unlike with a resale home, you can customize a new home right down to the finishes and countertops. And because the home is new, you can expect to spend a lot less on repairs and maintenance.

    New homes also give you more time to save. With resale homes, you typically must pay the deposit and down payment within a 30-to-90-day timespan. With new homes, the deposit can often be spread over several months or years.

    In case you’re new to buying pre-construction homes in Canada or you’d like a refresher, here are some important details to be aware of.

    Payment schedule for pre-construction homes

    Unlike a resale home when you usually pay the deposit within 24 hours of your offer being accepted, with a pre-construction home there’s typically a deposit payment schedule.

    With a pre-construction home, you’re usually expected to have a down payment of between 20% and 25%. This may sound like a lot at first, but the amounts are spread over several months and years. For example, you may be asked to make a deposit of $3,000 at the time of making an offer, followed by 5% within 30 days of the offer, 5% within 90 days, 5% within 180 days and a final 5% at the time of occupancy.

    Oftentimes, the deposit structure is up for negotiation. If the builder’s payment schedule doesn’t work for you, you should try to negotiate one that does.

    Mortgage rules for pre-construction homes

    In Canada, mortgage rules are the same for a new home as a resale home. For example, you’re required to pass the mortgage stress test in both cases. However, a key difference is timing. With a new home, you don’t know what mortgage rates will be when the property closes. Mortgage rates could be the same, or they could be higher or lower. This adds uncertainty. Without knowing what mortgage rates will be, you actually don’t know if you’ll be able to afford the property in the future.

    There’s also the issue of the property value for mortgage lending purposes. Lenders don’t sign off on the mortgage for a pre-construction home until the time of closing. You make an offer without financing, then hope to get financing at the time of closing.

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    Sean Cooper

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  • Fixed or variable mortgage rate: Which should you choose in 2024? – MoneySense

    Fixed or variable mortgage rate: Which should you choose in 2024? – MoneySense

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    It’s been a tough time for home owners (and first-time home buyers), but the Bank of Canada (BoC) has held interest rates steady since July 2023, and the latest economic data is leading experts to suggest that interest rate cuts may be on the horizon. So, what can Canadians expect from interest rates in the months and years ahead, and what does that mean for fixed mortgage rates and variable mortgage rates? We spoke to an economist and a mortgage broker to get a better sense of what’s ahead, and whether a fixed or variable rate is your best option in 2024.

    You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote*You will be leaving MoneySense. Just close the tab to return.

    What happened with interest rates in 2022 and 2023?

    Rates went up significantly over the past two years, and a lot of it had to do with post-pandemic inflation.

    “Central banks had to react very aggressively to the spike in inflation, and they jacked up interest rates significantly—475 basis points since March 2022,” says Robert Hogue, assistant chief economist at RBC Economics. (One basis point is equal to one hundredth of a percentage point. And 475 BPS means 4.75%.) “This is easily the most aggressive monetary policy we’ve seen in at least a generation.”

    John-Andrew Newman, a mortgage broker in Oakville, Ont., notes that this aggression was essentially a side-effect of the economic impacts of the COVID-19 pandemic. “The COVID environment brought all rates down because the government influenced the interest rate marketplace in a way that was intended to help Canadians manage the effects of various lockdowns,” Newman explains. “They went extreme in one way, which led to inflationary factors peaking after [COVID], and then interest rates started to go up.” 

    Rates climbed quickly to help tame decades-high inflation. “There was almost a whiplash effect [after COVID] as rates went up to the other extreme—and that’s where we are today,” Newman says.

    Many mortgage holders with fixed-rate mortgages secured before the pandemic now face steep payment increases at renewal. Canadian mortgage holders with variable rates are also dealing with higher costs, though the impact has not been the same for everyone—some have seen their payments increase with every hike in the prime rate, while others haven’t. 

    With a variable mortgage with adjustable payments (sometimes referred to as an adjustable-rate mortgage), the mortgage payments fluctuate in response to changes in the lender’s prime rate. Borrowers with this type of mortgage watched their payments increase as interest rates began to rise. 

    However, many variable-rate holders have a mortgage with fixed payments. As interest rates rose, their mortgage payment stayed the same, but the amount of principal paid each month decreased as the amount of interest paid went up. Some of these borrowers have seen their amortizations stretched to point that their payments are almost interest only, Newman says. Some have reached their trigger rate—the point at which the mortgage payment no longer covers the mortgage interest costs.

    This is one of the reasons it’s important to know what type of variable mortgage you have—the former can have a far bigger impact on your budget and cash flow in the short term, and the latter can result in a sudden spike when renewing your mortgage. That increase may be challenging for many mortgage holders to navigate, particularly if they’ve gone into negative amortization (when the monthly mortgage payments aren’t high enough to cover the interest owed on the loan). 

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    Erin Pepler

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