We’ve been mired in a low interest rate environment since the global economic crash of 2008-2009, with seemingly no end in sight.
The Bank of Canada has held its overnight rate at 1 per cent since September 2010. All we’ve heard from media, economists and Bank of Canada Governor Mark Carney over the last three years is that rates will return to historical levels….eventually.
Now, in the wake of Carney leaving his post early to become head of the Bank of England, the best estimate for the next rate hike is sometime in late-2014.
So what does this mean for Canadian homeowners and prospective home buyers?
First of all, it means interest rates on 5-and-10-year fixed rate mortgages are at record lows. You can get a 5-year fixed rate mortgage for less than 3 per cent, and you can lock-in for 10 years for less than 4 per cent.
It may pay to break your current mortgage and refinance at a lower rate.
Check out your banks’ online calculator to see what penalties, if any, you’d face if you break your mortgage early.
You’ll pay a prepayment charge of 3 months interest or the Interest Rate Differential, whichever is greater.
Variable rate mortgages, which are tied to the banks’ prime lending rate and have typically led to more savings for homeowners, are less attractive today.
Just a few years ago, banks were offering 5-year variable rate mortgages for as low as prime minus 95 basis points, or 2.05 per cent using the current prime rate of 3 per cent.
Today, the discount off of prime is just 50 basis points or less. That means the premium you’ll pay today to ‘lock-in’ and fix your payments for 5 years or longer is insignificant.
The low rate environment we’re in today should also mean that you’d better plan on higher rates when it comes time to renew your mortgage in a few years.
There’s never been a more attractive time to lock-in your mortgage, but don’t be caught off guard when you have to renew at 5 per cent (or more) down the road.
Another issue facing new homeowners and prospective buyers is that Canadian real estate is overvalued and our household debt to income ratio is rapidly approaching the levels seen in the U.S. before their housing market imploded.
Finance Minister John Flaherty has stepped in a number of times to try and cool off the Canadian housing market. Indeed, the market seems to be slowing down in places like Vancouver and Toronto.
If you’re on the outside looking to buy, here’s what you’ll want to do:
- Put down 20 per cent (or more) – If you don’t have the resources for a large down payment of 20 per cent or more, you’ll need a high-ratio mortgage, which means you’ll need to buy mortgage default insurance – the premiums range from 1.00% to 3.50% of the mortgage loan
- Shop around – Use a mortgage broker or do your own research online to find the best interest rates and payment terms that suit your budget.
- Don’t buy too much house – You’ve heard the term ‘house poor’? That’s when there’s no money left over after you’ve made your sky-high mortgage payment. Buying too much home is a sure-fire way to get in over your head and bury yourself in debt.
- Don’t put all your eggs in one basket – Not only should you have enough money left over to buy groceries and have a little fun, you’ll also need to save for the future. Most of our wealth is tied up in our homes, which is fine when you’re in your twenties and thirties, but you’ll need to diversify as you get older. Many of us think of our paid-off homes as a retirement nest egg, but downsizing in retirement is turning out to be more myth than reality.