While mortgage rates have been tumbling steadily over the last couple of months, many are now in record-setting territory, with certain 1- to 5-year fixed rates now available for under 2.00% from discount brokers.
Concerns over a second wave of COVID-19 have caused Canada’s 5-year bond yield to fall to its own record-low, which in turn is pulling down fixed mortgage rates.
HSBC Canada led the trend earlier this month when it announced a 5-year fixed default-insured mortgage for 1.99%, the lowest rate ever for a 5-year fixed at the time. There are now multiple brokers offering 5-year fixed rates starting at 1.98%, and even lower in some cases, although those rates entail restrictive conditions.
The lowest fixed mortgage rate currently available, according to rate comparison website RateSpy.com, is the 1-year fixed at 1.69% (for those putting down less than 20% or more than 35%).
Even the often-shunned 10-year fixed rate is reaching new lows, currently available nationally as low as 2.84%.
“Fixed rates are dirt cheap because funding costs keep sliding,” RateSpy founder Rob McLister told CMT, pointing to the 5-year swap rate being just 8 bps from its all-time low, the benchmark 5-year bond yield at a record low and credit spreads near three- and four-month lows. “With a bearish economic report or two, we could slide further into uncharted depths, as soon as next month.”
McLister notes this volatile rate environment can pose challenges for the industry, since borrowers are constantly shopping around for the latest record-low rate.
“This kind of rate environment is not a cakewalk for brokers and lenders. Savvy borrowers keep watching rates well after they’re approved,” he said. “When they see better, they often ask for better, sometimes right up to closing. The number of rate adjustments at lenders right now is epic.”
Why Are Mortgage Rates So Low?
There are a number of factors contributing to today’s record-low rates. As mentioned above, investors are concerned that a second wave of COVID would hamper a sustained economic recovery, which has caused bond yields—which lead fixed mortgage rates—to fall.
In addition, the Bank of Canada’s ongoing $5 billion in weekly government bond purchases has continued to uphold lender confidence that markets will remain liquid, allowing them to offer lower rates as funding costs fall.
“The BoC’s [quantitative easing] programs are helping to reduce the risk premiums that have elevated fixed-rate lending spreads above their normal levels,” noted Dave Larock, a mortgage broker with Integrated Mortgage Planners Inc.
“Fixed and variable rates are likely to remain at or below their current levels for as long as the Bank continues to see fog and choppy waters ahead – and most economic forecasters now predict that may well be for several years hence.”
Variable rates are continuing to fall as well, even though prime rate—the rate upon which floating mortgages are priced—hasn’t budged from 2.45%, where it’s been since April 10.
Instead, lenders have been gradually reducing their variable rates by increasing their discount from prime rate.
While they’re a ways off from the prime – 1.00% we saw pre-COVID, they’re slowly clawing their way back.
The lowest nationally available floating rate is currently 1.95% (prime – 0.50%), although certain discount brokers are offering rates as low as 1.69% (prime – 0.76%) for default-insured mortgages.
“Lenders’ costs have fallen after spiking during the COVID crisis,” McLister noted. “As a result, lenders have profit margin to play with. Barring the unexpected, there’s a good chance we could even see prime – 0.90% (1.55%) or better by the end of this year.”
Is it worth breaking your current mortgage for a record-low rate?
While these rock-bottom rates are great news for new homebuyers, they’re likely a source of frustration for borrowers who are currently locked in at much higher rates.
For example, someone who locked in a 5-year fixed rate just six months ago likely would have obtained a rate of around 3.39%, the going rate at the time.
With a comparable default-insured 5-year fixed rate now as low as 1.99%, that may be too large of a spread for current borrowers to stomach.
Which begs the question: is it worth breaking your existing mortgage to obtain a lower rate? It’s a difficult question for many fixed-rate holders, who would stand to face a potentially crippling prepayment penalty.
The question was explored in a recent Rates.ca piece, which walked through a real-life situation of a borrower breaking a 5-year fixed rate of 3.39%, despite a $32,000 penalty, in order to lock into a much lower 2.29% 5-year fixed rate.
After making a 20% lump-sum prepayment and reinvesting the monthly mortgage payment savings back into the mortgage in the form of prepayments, the borrower surprisingly still comes out ahead by $19,248 after the five years.
While this strategy isn’t for everyone, it may be worth exploring if you’re currently locked in at a much higher interest rate. If you aren’t able to run a similar scenario like the one above for your own situation, it may be worth reaching out to a mortgage broker who could easily do the calculations to see if breaking your mortgage makes sense.
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