In response to our current pandemic reality the Bank of Canada has lowered its key lending rate to .25%. And, the big banks have dropped their prime lending rates by 1.5% affecting variable rate mortgages.
Bond yields have lowered as well, however fixed rate mortgages have not been affected yet. (as of May 6, 2020)
How will this affect the interest rate available if you are looking to renew your mortgage? And, what are your options in the days of Covid-19?
Mortgage renewal arrives at the end of your agreed upon mortgage term. Very rarely can you pick and choose the date to renew. Therefore, you need to choose the best rate from the options that are before you. Here are some ideas to help you decide.
- When researching variable rate mortgages look for banks offering prime minus 0.80% or better.
If this is not available, choose a short-term fixed rate mortgage hoping that the interest rates will improve when you renew in 1-2 years.
- Borrowers who renew with their existing lender are not subject to the stress test, which could come as a relief to some homeowners who might have overextended their finances to get into the housing market when rates were lower.1
- Consider your finances, how will a higher interest affect your family. Do your own stress test.
- Be prepare - do your research online and visit other banks or branches. If a mortgage specialist knows you are shopping around, they may provide deeper cuts.
- Consider using a mortgage broker.
- Start shopping early; 35-40 days before renewal.
- Be prepared to lock in early.
- Avoid guessing what will happen to interest rates; even professional financial analysts have been wrong.
- Choose the best from the options before you.
- Consider choosing the cheaper between a 5-year variable rate and a 1-2-year fixed mortgage rate as suggested by: Robb Engen from Boomerandecho.com
- If you’re renewing your mortgage, start with the basic premise that borrowers who choose a variable rate mortgage typically save more money (nine times out of 10) than fixed rate borrowers over the life of their mortgage.2
What are Your Options in the Days of Covid-19?
The interest gap between variable and fixed rate mortgages has narrowed in the last few months. Therefore, other factors may come in play:
- Could you afford the added monthly expense if the interest rates increase by 75 - 100 basis points (from 2.25% to 3-3.25%). If not, choose a fixed mortgage.
ex:
| Mortgage | Mortgage Rate | Monthly Payments |
| $480,000 | 2.25% | $2,091 |
| $480,000 | 3% | $2,272 |
| $480,000 | 3.25% | $2,334 |
- If we experience more than 1 rate hike, the 5-year fixed mortgage may become the better option considering monthly interest payments. However, fixed mortgages generally limit the ability to make extra payments. Making extra principal payments drastically affects the total interest payment over your term. If this is a concern, the variable rate mortgage may be the better option for you.
- Start shopping early, 35-40 days before renewal since the mortgage process may be extended.
- Be prepared to lock in early. With the Covid-19 situation, price hikes are unlikely.
- If a fixed rate mortgage is preferred due to less volatility, keep an eye on Bond yields. If Canada’s 5-year government bond yield closes above 0.60 percent then apply immediately to lock-in a rate hold.2
- If your income has been interrupted due to Covid, consider renewing with your existing lender to avoid an new stress test.
There’s a lot more that goes into a mortgage decision than simply getting the lowest interest rate. There are variable rates versus fixed rates, short terms versus long terms, not to mention other mortgage features such as pre-payment and double-up privileges, and pre-payment penalties to consider as well.2
When dealing with extra financial concerns and needing specialized help to navigate the mortgage process, a mortgage broker can be very helpful. They are on your side, not the banks.
For more information on mortgage types click here.
Sources:
1. https://boomerandecho.com/my-mortgage-renewal-strategy/
2. https://boomerandecho.com/renewing-your-mortgage-this-year-what-you-need-to-know/
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