Tuesday, May 4, 2021 / by Earl Gaddi
James Laird, co-founder of Ratehub.ca and President of CanWise Financial, explains the latest news on the Canadian mortgage market and how it may affect consumers in 2021.
What the latest Bank of Canada rate announcement means
Despite the fact that mortgage rates have been and will likely remain low for some time, Laird explains that this is not the primary driving force behind Canada's burgeoning real estate market. Instead, he attributes it to the pandemic's influence on lifestyle changes. Many of us have reconsidered our living arrangements, especially those who now work from home, according to Laird, and this has prompted people to purchase a home that is better suited to their current needs.
“No one says, 'I wasn't planning on buying a house, but now that rates are low, I'm going to buy one.' “It's never happened before,” Laird said. “It's other lifestyle factors that make you want to buy a new house or make changes to the one you have. Rates are only one factor in the equation.”
While the overnight rate that influences the mortgage market is expected to remain unchanged for the time being, fixed-rate and variable-rate mortgages have been gradually diverging in the first months of 2021. The overnight rate has a greater impact on variable rates because banks use it as a benchmark to determine their own prime rate, which is used to create variable mortgage rate offerings. Variable rates have remained virtually unchanged as a result of this. Fixed-rate mortgages, on the other hand, have been rising in price, prompting Laird to say that demand for variable-rate mortgages has increased.
“Now that fixed rates have risen a little, we are seeing more demand on the variable side,” Laird explained, “because the spread between variable and fixed rates is wider than it was before because variable rates haven't changed at all.” “Fixed rates are still the most popular, but compared to a month ago, more people are opting for variable [rates].”
If you’re a new or current mortgage holder
Consumers who are more risk averse may want to opt for a fixed-rate mortgage rather than a variable-rate mortgage, according to Laird. If you have the financial flexibility to manage a variable rate if it rises, and you don't mind a little risk, a variable rate could be a good fit for you.
Existing mortgage holders may be enticed to break their terms in order to chase a lower rate and save money for other projects if ultra-low mortgage rates become available. When it comes to fixed-rate mortgages, however, Laird points out that there are usually not many savings to be had because the penalty for breaking the mortgage could be equal to the savings—the lower the current market rates are, the higher the penalties for breaking the mortgage can be, he says. The proper steps in determining the best course of action are to obtain a mortgage penalty quote from your provider and then speak with your mortgage broker to work out the math.
“If you're nearing the end of your term, it can make sense,” says Laird, “especially if you think rates will be higher by the time your renewal comes up.”
What’s on the horizon for mortgage rates in 2021