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big break: 'One of the first times in history' when it's cheaper
First-time homebuyers looking for mortgage financing have rarely had it so good. Mortgages are available for about three per cent. Homebuyers were paying 21.75 per cent interest on their five-year mortgages in the summer of 1981.
People now entering the housing market have another big break. Homeowners can have the security of fixed rates and anticipate paying less over the term of the mortgage than they would with variable rates.
"We're thinking it might be one of the first times in history where it might make sense to go fixed. Looking at the objective data, it may be cheaper," said Kerri-Lynn McAllister of RateHub.ca, a website that compares mortgage rates and offers a referral service to lenders and mortgage brokers.
Ryan McKinley, a mortgage development manager at Vancity, said homebuyers are "flocking" to fixed rates.
Seventy-nine per cent of those who took on a new mortgage last year went for fixed interest rates, according to the Canadian Association of Accredited Mortgage Professionals. At RateHub, 85 per cent of the inquiries in February were for fixed rates.
For variable interest rates for mortgages, keep your eye on Canada's key interest rate. It goes like this:
The Bank of Canada determines an overnight lending rate at which the large banks borrow and lend one-day funds among themselves.
The banks lend funds to their most credit worthy customers at what is called the prime lending rate. Lenders set the variable rates they charge for a mortgage at plus or minus prime, depending on their strategy to attract investors.
Inflation is a crucial factor affecting rates. The Bank of Canada closely monitors the inflation rate and increases the overnight lending rate when concerns are raised.
A higher rate increases the cost of borrowing money. But when inflation is low, the overnight lending rate is kept low in an effort to stimulate the economy by lowering the cost of borrowing. The overnight interest rate has been unchanged for about 2½ years as inflation hovers at one per cent or less. Analysts predict a rise in the overnight lending rate possibly later this year or early in 2014. Once the prime rate increases, variable interest rates would rise.
The overnight lending rate is currently at one per cent. The prime lending rate is three per cent. A list of rates for a five-year variable mortgage on RateHub in mid-March starts as low as 2.6 per cent (prime minus 0.4 percentage points).
Typically, when the economy is booming, investors are more interested in equities than in bonds. The demand for bonds drops, leading to lower bond prices. A drop in prices leads to an increase in bond yields.
But as the economy struggles as it has been since 2008, investors turn to bonds. Increase in demand boosts bond prices and lowers yields. Fixed rates drop as bond yields shrink.
The listing of fixed rates for a five-year mortgage begins as low as 2.70 per cent. When inflation increases and the Bank of Canada hikes the overnight lending rate, a hike would be followed by an increase in variable rates. At that point, a homeowner with a fixed-rate mortgage, taken out this month, would be paying less than someone with a variable rate that bounces up.
People now entering the housing market have another big break. Homeowners can have the security of fixed rates and anticipate paying less over the term of the mortgage than they would with variable rates.
"We're thinking it might be one of the first times in history where it might make sense to go fixed. Looking at the objective data, it may be cheaper," said Kerri-Lynn McAllister of RateHub.ca, a website that compares mortgage rates and offers a referral service to lenders and mortgage brokers.
Ryan McKinley, a mortgage development manager at Vancity, said homebuyers are "flocking" to fixed rates.
Seventy-nine per cent of those who took on a new mortgage last year went for fixed interest rates, according to the Canadian Association of Accredited Mortgage Professionals. At RateHub, 85 per cent of the inquiries in February were for fixed rates.
For variable interest rates for mortgages, keep your eye on Canada's key interest rate. It goes like this:
The Bank of Canada determines an overnight lending rate at which the large banks borrow and lend one-day funds among themselves.
The banks lend funds to their most credit worthy customers at what is called the prime lending rate. Lenders set the variable rates they charge for a mortgage at plus or minus prime, depending on their strategy to attract investors.
Inflation is a crucial factor affecting rates. The Bank of Canada closely monitors the inflation rate and increases the overnight lending rate when concerns are raised.
A higher rate increases the cost of borrowing money. But when inflation is low, the overnight lending rate is kept low in an effort to stimulate the economy by lowering the cost of borrowing. The overnight interest rate has been unchanged for about 2½ years as inflation hovers at one per cent or less. Analysts predict a rise in the overnight lending rate possibly later this year or early in 2014. Once the prime rate increases, variable interest rates would rise.
The overnight lending rate is currently at one per cent. The prime lending rate is three per cent. A list of rates for a five-year variable mortgage on RateHub in mid-March starts as low as 2.6 per cent (prime minus 0.4 percentage points).
Typically, when the economy is booming, investors are more interested in equities than in bonds. The demand for bonds drops, leading to lower bond prices. A drop in prices leads to an increase in bond yields.
But as the economy struggles as it has been since 2008, investors turn to bonds. Increase in demand boosts bond prices and lowers yields. Fixed rates drop as bond yields shrink.
The listing of fixed rates for a five-year mortgage begins as low as 2.70 per cent. When inflation increases and the Bank of Canada hikes the overnight lending rate, a hike would be followed by an increase in variable rates. At that point, a homeowner with a fixed-rate mortgage, taken out this month, would be paying less than someone with a variable rate that bounces up.
Statistics show a variable-rate mortgage usually costs less over the life of the mortgage than a fixed-rate mortgage, although fluctuations may cause some sleepless nights as mortgage holders worry about covering possible increases in monthly payments.
"It used to make a lot more sense to go variable, even up to a year ago," said McAllister of RateHub.
But the spread between fixed and variable rates currently is minimal and once interest rates increase, the advantage of variable-rate mortgages will disappear, she said.
McKinley of Vancity advises first-time buyers to look at more than rates. Don't just go with the lowest rate, he said, because posted rates do not tell the full story. Check out conditions, fees and penalties.
Most lenders are prepared to negotiate a discount on posted rates, McKinley said. In addition, some institutions, including Vancity, allow homeowners to split their mortgage with a portion at a fixed rate and the remaining amount at a variable rate.
"It used to make a lot more sense to go variable, even up to a year ago," said McAllister of RateHub.
But the spread between fixed and variable rates currently is minimal and once interest rates increase, the advantage of variable-rate mortgages will disappear, she said.
McKinley of Vancity advises first-time buyers to look at more than rates. Don't just go with the lowest rate, he said, because posted rates do not tell the full story. Check out conditions, fees and penalties.
Most lenders are prepared to negotiate a discount on posted rates, McKinley said. In addition, some institutions, including Vancity, allow homeowners to split their mortgage with a portion at a fixed rate and the remaining amount at a variable rate.
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