Five-year fixed mortgage rates that start with a “1” are an endangered species.
For the first time since last summer, Canada’s major banks are all back above 2 per cent on Canada’s most popular mortgage term.
Compared with just two months ago, that means a typical borrower without default insurance will now pay almost $4,900 more interest over a new five-year mortgage term. That’s based on Canada’s average mortgage balance, which is roughly $300,000, according to TransUnion.
If you’re a mortgage shopper and that sounds depressing, here are five reasons why it shouldn’t.
- Assuming you’re not wed to a major bank, you can still find small banks, credit unions and mortgage brokers that’ll lock you in at just 1.89 per cent or less for five years. If you’re getting a default-insured mortgage, they’re still as low as 1.59 to 1.79 per cent, depending on your province.
- Even a typical, uninsured big-bank five-year fixed rate of 2.14 per cent is still less than half a percentage point from what had been the lowest widely available five-year fixed rates ever.
- Despite today’s higher rates, almost 60 per cent of your payment pays off principal on a standard new mortgage. Barring plunging home values, that’s money you’ll get back when you sell or pull out equity. Twenty years ago, almost 80 per cent of payments on new mortgages went into a bank’s pocket in the form of interest.
- If fixed rates don’t float your boat, you can hook a variable rate for just 0.99 per cent (default-insured) to 1.29 per cent (uninsured) at HSBC and select mortgage brokers. A variable rate will mean you’ll very likely end up paying more than fixed if the Bank of Canada hikes rates one percentage point or more, but you also get a potentially cheaper penalty if you break the mortgage before five years.
- Since the Bank of Canada’s 2-per-cent inflation target came to be in 1995, there have been six rate-hike cycles. On average, the Bank of Canada lifted rates about six times (totalling roughly 1.5 percentage points) during each cycle. That’s why the one percentage point “break-even” threshold noted above could easily be exceeded. If the central bank does boost rates by a percentage point or more, today’s humdrum 2.14 per cent five-year fixed rates should outperform the typical 1.4 per cent variable rate, assuming you stay in the mortgage for five full years.
Looking ahead, there’s a good chance we’ll see even higher fixed rates by year-end as the economic rebound gains steam, as people start spending their accumulated pandemic savings, as employment rebounds in the service sector and as the Bank of Canada stops buying government bonds to keep rates low, especially if commodity prices keep soaring.
So while the post-COVID-19 economy portends higher fixed rates, look at the bright side. It’s still amazingly inexpensive to borrow – wild home prices aside.