According to a number of recent reports from the Canadian Mortgage and Housing Corporation (CMHC), the housing finance system in Canada maintained a steady-level of lending in the midst of the global financial crisis (and subsequent major economic recession) of 2007, which began to impact Canada significantly as of 2008-2009. Other nations across the globe were not as fortunate as Canada. And today, the Canadian residential real estate market and Canadian economy are gradually returning to pre-recession growth levels.
Housing Market in Canada
Yet the reality is that the resilient Canadian housing market as a whole is still reeling, slowly recovering during a tentative, sluggish global economic recovery. The latest sales activity data from the Canadian Real Estate Association (CREA) reflects this continued growth in the Canadian housing market.
Overall, home sales rose across the provinces, according to the CREA’s latest press release, gaining momentum in the month of November 2010 after hitting an annual low in July 2010. The most impressive leap in residential real estate activity occurred in the Greater Vancouver housing market, which recorded an 11.3% increase.
If you are a prospective home buyer in Canada, now may be the right time for you to consider the different financing options available since mortgage rates are becoming increasingly attractive for Canadians as the national housing market as a whole continues to recover. So with these facts in mind, we have compiled a detailed review of the different mortgage rates offered in Canada. In addition, we have included what you can expect down the line if you’re interested in purchasing a home and taking advantage of the current positive residential real estate market trends:
Fixed-Rate and Variable-Rate Mortgages
There are two basic mortgage financing methods: fixed-rate mortgages and variable-rate mortgages. Depending on your unique financial situation, each method comes with certain pros and cons which you should keep in mind. But to put it simply, here is a basic description of fixed-rate and variable-rate mortgages:
This type of mortgage provides home owners with the security of a steady interest rate over the term of the mortgage loan. Thus, mortgage payments will be consistent month-to-month and year-to-year until the mortgage principle and interest is paid down in full.
This type of mortgage provides Canadian home buyers with an interest rate which varies according to the current housing market conditions. The interest rate may rise or fall accordingly as well the amortization on the principle of the mortgage amount.
The Key Difference between a Fixed-Rate and a Variable-Rate Mortgage
The main point to remember when sorting through your housing finance options is that both fixed-rate and variable-rate loans come with some amount of inherent risk. For instance, fixed-rate mortgages are attractive to prospective home buyers due to the consistent, steady payments over the duration of the mortgage.
So, millions of Canadian home owners swear by the fixed-rate mortgage option since the consistent payment schedule makes maintaining a disciplined budget easier. However, the down side to a fixed-mortgage rate is that should the current interest rate drop, your fixed mortgage rate remains the same even though other home owners with variable-rate mortgages are saving money over the long run.
Along those lines, a variable-rate mortgage allows Canadian home owners increased flexibility as a result of the possibility of increased savings over the long-term. If the national interest rate falls, mortgage holders with a variable-rate reap the financial benefits.
But on the other hand, should the national interest rate rise, the home owner will be obligated to adjust their payments to fit the latest rate. For many Canadian home buyers, the risk of a variable-rate mortgage outweighs the reward of long-term savings over the term of their mortgages.
Variable-rate mortgages fluctuate daily and sometimes hourly depending on the current state of the real estate market across the nation. Bond rates, inflation, and simple supply and demand are key elements of the current interest rate offered by the major Canadian mortgage lenders such as the Royal Bank of Canada and TD Canada Trust.
In the past, variable-rate mortgages were an attractive option for first-time home buyers, but the recent turmoil in the housing market has forced these same home owners into the difficult financial position of owing more money than their property is worth based upon the current real estate market trends.
Canadian Mortgage Rates versus U.S. Mortgage Rates
As mentioned above, the Canadian housing finance system proved to be much more resilient than the neighboring United States of America. For example, the current 5-year fixed-rate mortgage in Canada averages to approximately 4.5% over the period of the loan.
But fixed-rate mortgages in the U.S. have struggled to attract prospective home buyers. Currently, a 30-year fixed mortgage in the U.S. carries an average rate of approximately 5.2%. This difference may seem slight. But over the term of the mortgage loan, the smallest difference in interest rate can vastly effect a home owner’s financial position. Also, consider the volatility of the U.S. residential real estate market alongside Canada’s relative resilience in the face of a global recession.
When is a Good Time to look for a Mortgage?
The best answer to this question is when interest rates on fixed-rate mortgages are lowest. This depends on a few factors:
- the time of year (i.e. the warm or cold months)
- the current rate of residential real estate sales
- the current average interest rate
The best time to look for a mortgage usually occurs during the winter months in Canada when residential home sales are the lowest. Mortgage lenders tend to lower interest rates in accordance with simple supply and demand principles. Lower interest rates attract more prospective home buyers. And likewise, as demand for homes rises, interest rates climb accordingly. It is difficult to predict the absolute best moment to consider a mortgage; however, the annual average interest rate across the nation is a good indicator of the current upward or downward trends in the daily interest rate.
Are There Any Hidden Costs with Each Mortgage?
Whether you opt for a fixed-rate mortgage or a variable-rate mortgage, there are certain so-called “hidden fees” you must be aware of before finalizing your contract with a mortgage lender. The most efficient way to prevent any surprise costs is to thoroughly and completely review ever word in the mortgage contract. This may seem like a daunting task, yet this is truly the most effective way to protect you from unethical mortgage brokers and lenders.
Some possible fees may include the following:
- closing costs as high as 5% of the mortgage principle (i.e. a ‘balloon’ payment)
- pre-payment fees
- home inspection fees
- national tax and title fees
If you should come across a ‘once in a lifetime’ mortgage offer, odds are that there is a substantial closing payment due at the end of the mortgage’s term. So, read all documents carefully since the mortgage lenders are required by law to assist you in understanding these hidden costs.
Some Canadian mortgage lenders actually penalize early and lump sum payments too; however, most of the reputable mortgage lenders clearly state whether or not pre-payment is encouraged. Government housing inspections often cost several hundred dollars. So, it is wise to coordinate these costs for yourself. Also, many Canadian home owners fail to account for the annual taxes assessed on their property.
The Final Verdict
No one knows what the future of the Canadian residential real estate holds. And depending on a number of individual factors such as income, savings, credit, and cumulative debt, you may not qualify for the lowest mortgage rate available. But this should not discourage you since there are several different forms of both fixed-rate and variable-rate mortgages. If you are not approved by one lender, it is worth shopping elsewhere for the absolute best possible rate. The different types of mortgages include:
- closed fixed-rate mortgages
- convertible fixed-rate mortgages
- open fixed-rate mortgages
- closed variable-rate mortgages
- open variable-rate mortgages
Closed versus Open Fixed-Rate Mortgages
This type of mortgage loan offers prospective home buyers the security of a steady monthly (or bi-monthly) payment schedule. But they also vary slightly. A closed fixed-rate mortgage comes with the stipulation that the mortgage holder cannot pre-pay, re-finance, nor re-negotiate the terms of the mortgage for the duration of the loan.
On the contrary, an open fixed-rate mortgage allows the option to apply as many pre-payments as you wish without incurring any of the aforementioned hidden fees and unexpected costs. A convertible fixed-rate mortgage provides the flexibility of converting an initially closed contract to an open contract if certain stipulations are met by the mortgage holder. Although, these mortgages are typically tougher to qualify for if you do not possess the proper assets and income level.
A closed variable-rate mortgage operates much in the same manner as a closed fixed-rate mortgage. Your payments will be locked-in for the duration of the mortgage’s term despite varying month-to-month based upon the current interest rate. Often closed variable-rate mortgages include the option of converting to a fixed-rate mortgage after a specific period of time, usually near the end of the mortgage’s term.
Again, an open variable-rate mortgage works much in the same way as an open fixed-rate mortgage. You can pay the mortgage down in full or in lump sums without incurring any penalties from your mortgage lender. These loans too can be converted into fixed-rate mortgages after a specified duration according to the terms on the mortgage contract you sign. But keep in mind that the above information is general in nature and each mortgage contract should be carefully reviewed with a professional mortgage broker.
A Snapshot of the Current Canadian Mortgage Rates
At the time of the writing of this review, the current mortgage rates in Canada are quite attractive if you are considering purchasing a residential property. For example, many of the major lenders in the nation are offering one-, two-, three-, four-, five-, seven-, and ten-year fixed-rate mortgages for as low as 4.1% on average.
Keep in mind that shorter term mortgages receive the most attractive interest rates. But, the caveat is that these mortgages come with strict qualification requisites. For example, a one-year close fixed-rate mortgage currently finances for as low as 2.9% at the time of the writing of this review. Another example of an attractive Canadian mortgage rate is a 2.8% closed variable-rate loan.