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Variable or Fixed Mortgage Rates?

Variable vs Fixed Mortgage Rates

During the prolonged pandemic, the real estate market has blown all expectations out of the water from coast to coast. Throughout Canada and particularly in the hot Toronto/GTA housing market prices have skyrocketed with levels of housing appreciation that remain in the double digits. The number of housing sales has increased markedly as well.

According to The Toronto Regional Real Estate Board, we are still in very much a seller’s market. Sales have increased by 51% as compared to this time last year which is a sales record for the Toronto housing market. TRREB reports that the average price of single-detached residences has increased to a historic high of 1.37 million which represents a 23% year-over-year increase. 

What accounts for such flurried activity in the Ontario housing sector? The TRREB attributes the current housing boom to promising signs of the Province’s economic recovery with limited inventory on the market making bidding wars commonplace and pushing up property prices to unprecedented levels. These market factors are coupled with extremely low borrowing costs on both variable-rate mortgages and fixed mortgages.

Historically Low Mortgage Rates on Fixed and Variable Rates

One of the most significant factors driving the housing market in Ontario is the extremely low mortgage rates on all types of mortgage loans. This applies to both fixed mortgage rates and variable rates.

Both mortgage interest rate types are reliant on different factors. While variable rates are affected primarily by any changes to the Bank of Canada (BOC) overnight rate, a change in the direction of a fixed rate is very much contingent on changes to bond yields and is determined by the bond rate.

Any changes that are made to either the bond rate or the BOC lending rate will largely determine the degree of flexibility lenders will have in adjusting mortgage rates accordingly. If there is a significant rise to the BOC lending rate then the pressure becomes such that lenders are not able to absorb all the costs of borrowing and therefore these costs are transferred to the borrowers in the form of an increase in the mortgage rate associated with mortgage loans. 

Conversely, if there is a drop in either the bond rate (for fixed mortgage rates) or a drop in the BOC lending rate (for variable rates) then lenders can afford to provide a discount for borrowers as the price of lending is less expensive for the lenders. As a result, the mortgage rates offered on most mortgage loans decreases.

As the pandemic took hold, the Government worried about a potential collapse to the housing sector with possible large mortgage defaults arising and therefore took several dramatic steps to help prop up mortgage-backed securities. 

A cash influx from the Federal Government of 150 billion was allocated to the real estate sector to help lenders with the overall costs of borrowing and to avoid mass default on mortgages from the negative economic impacts of Covid-19 on the economy. In addition to much-needed funds to prop mortgage-backed securities, the Bank of Canada took the unusual measure of decreasing the overnight rate to a historic low of 0.25%.

What is a Fixed-rate mortgage?

A fixed-rate mortgage loan is a mortgage that locks in a given interest rate for a designated period usually 3 to 5-year terms and regardless of fluctuations either way in the fixed mortgage rate during the term of the loan, the rate will remain the same until the loan is up for renewal.

What is a Variable-rate mortgage?

A variable-rate mortgage loan is a mortgage that has a “floating rate” associated. For the agreed-upon term of the loan, the interest rate will be subject to fluctuations in the mortgage rates. This can be advantageous if rates drop dramatically as they have over the last year. It can cost more, ultimately, however, if there are changes northward in variable mortgage rates.

Recent Changes to Fixed Rates- Heading Northward

Although both fixed and variable interest rates remain at very low levels, in the past several weeks we have seen a slight increase in fixed rates. This is a direct result of an increase in bond yields. Any change to the bond rate will have an impact on fixed rates.

Ontario lenders have recently announced there will be an increase of between 0.1% and 0.2% to the current variable rates offered by most lenders on Fixed-rate mortgages. As of the end of February, the lowest fixed rates available stood at 1.39 percent. An increase of between 0.1 to 0.2 of a percentage point is minimal but is a good predictor of a trend to an increase of bond yields that will affect any northward trends to fixed mortgage rates moving forward.

What About Variable Rates?

Fortunately, as bond yields increased recently, the BOC announced that they would not be increasing the overnight rate for now. This represents a protective measure, helping to ensure that the economy has a chance to recover from any negative impact from the ongoing pandemic. As long as the BOC lending rate remains the same, variable interest rates will continue to remain at the same levels as we have been seeing. The lowest rate that has been reported is an astonishing 0.99%.

Mortgage Broker Store Can help to negotiate Private loans 

At Mortgage Broker Store, we are in the position to help Ontario homeowners with private mortgage loans when seeking mortgage financing with damaged credit. With access to a broad network of private lenders throughout Ontario, we will be able to address any concerns you have while directing you to a relevant lender that will be able to help achieve your mortgage goals.

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.

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