Money Canadians rushing to lock down five-year fixed rate mortgages

02:38  14 september  2017
02:38  14 september  2017 Source:   Maclean's

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Consumers are rushing in droves to lock in five - year fixed mortgage rates ahead of future Bank of Canada rate hikes. “Historically, the majority of Canadians who shop for mortgage rates have taken a variable rate the majority of the time,” says Dan Eisner, CEO of True North Mortgage in Calgary.

A five year fixed closed mortgage rate is the preferred rate of most Canadians . It's offered by all the major banks and mortgage brokers. A fixed closed rate guarantees that the rate will stay the same for five years , and that the conditions you agree to will not change.

If you’re renewing a mortgage this month, chances are you will do so at the five-year fixed rate. At least, that’s what the numbers by LowestRates.ca show. Consumers are rushing in droves to lock in five-year fixed mortgage rates ahead of future Bank of Canada rate hikes.

“Historically, the majority of Canadians who shop for mortgage rates have taken a variable rate the majority of the time,” says Dan Eisner, CEO of True North Mortgage in Calgary. “But not these days.”

Since January 2014, 56% of Canadian borrowers who applied for a mortgage through LowestRates.ca have gone variable, compared with 43% of those who got a five-year fixed. But this past August, there was a shift, where the five-year-fixed rate mortgage saw a sharp increase in applicants, with 59% of users on the LowestRates.ca site opting for this option versus only 39% opting for the variable mortgage.

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Chart 2: canadian mortgage rates . Average interest rate over five years , % 20. 18 Posted 5 - Year Fixed Mortgage Rate . Households with pre-approved mortgages rush to take advantage of lower interest rates . Second, as rate hikes are implemented, home sales tend to fall over the next few

Mortgages and Mortgage Loan Rates for all 50 states. Comprehensive. Objective and Free from Bankrate.com. City or Zip Code. Loan amount. $ Down Payment. ARM. Interest Only. 30 year fixed .

READ: That was probably it for interest rate hikes in Canada for a while

“The spread between the variable and fixed rate mortgages has shrunk substantially since the Bank of Canada rate hike earlier this month,” says Eisner. Most people weren’t expecting the move but now the five-year fixed rate looks more attractive, he adds. “The variable rate is always lower but the question is, ‘by how much?’”

And while not all banks have increased their five-year mortgage rates yet, they may all do so by Friday. “By looking at long-term bond rates, it looks like the five-year fixed rate will go up between 0.1% and 0.15% by the end of the week…So if I were personally getting a mortgage, today is a good day to get the five-year fixed rate,” says Eisner.

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As what we have predicted just a week ago here at this blog – that there is only a small window of 1 to 3 months to lock down fixed rate mortgages below 2% p.a.; banks are now rushing to revise their fixed rate mortgage loans in the past 2 weeks as

The five - year fixed closed rate and the five - year special fixed closed rate are now both 3.79 per cent. With many Canadians carrying a heavy debt load, rising mortgage rates can make housing less affordable for some families.

Still, Justin Thouin, co-founder and CEO of LowestRates.ca crunched the numbers and notes, “Based on the past 30 years, staying in a variable-rate mortgage is still the right choice in the long run if your goal is to pay as little interest as possible.”

From a historical perspective, the variable mortgage rate is often lower, meaning homeowners pay less in interest overall. But it might be worth it to pay a little more for a fixed rate for the next five years, in case interest rates rise dramatically.

Indeed, Eisner doesn’t foresee interest rates going back down anytime soon. For one, he notes that the economy is strong and likely will keep strengthening over the next two years. And even though the difference between the rates on today’s five-year fixed and the five-year variable is razor-thin right now, that spread is likely to widen as the economy picks up steam and more interest rate increases are announced.

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The case for fixed rate Fixed rate mortgages are chosen because of the high level of stability they provide. A fixed rate mortgage offers the security of locking in your > Canadians would have been better off with a variable rate mortgage compared to a five - year fixed rate 89% of the time1.

Even though fixed rate borrowers end up paying more than their variable rated badass brethren, a whole bunch of Canadians end up going with a 5 year fixed mortgage instead. But what about now, during some of the lowest interest rates in history? Wouldn’t locking in be a good idea, considering

MORE: Why didn’t markets see the Bank of Canada interest rate hike coming?

Eisner’s recommendation? Go for the five-year fixed term at today’s rate and aim to pay off your mortgage in under 10 years by making a concerted effort to make extra payments whenever you can.

“They almost all come with 10% or 20% annual prepayment options—whether you do it on the anniversary of the mortgage or throughout the year,” he says. If you’re diligent with repayment strategies, you can double up your payments and shorten your 25-year amortization schedule down to five or seven years. “The only time you see prepayment options missing is with super low rates so avoid those. It’s often worth paying a fraction more for the prepayment privileges.”

What’s the bottom line? Even though the five-year variable rate has historically been a popular option, economists generally agree that interest rates are set to steadily climb over the next few years. For that reason, locking in a five-year fixed rate—though a bit higher than the variable rate right now—is the smart move. “You’ll have the peace of mind of knowing your mortgage rate is at these low rates for five years at least so that you can concentrate your efforts on paying it down quicker,” says Eisner.

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