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There’s a learning curve to financing your home and plenty of dotted lines to sign before finalizing your mortgage. But finding the best suited mortgage for your financial outlook is a key ingredient to riding the rocky waves in the Canadian housing market right now.
Mortgage interest rates have sat at an all-time low, but like any trend, they will fluctuate and go higher and peak in line with record-high inflation rates. And then eventually go down again. Economists predict interest will rise throughout 2022, but in bite-size increments. Even with the Bank of Canada's recent announcement that they’ll maintain the policy rate (for now).
As a starting point to making your already-probably-pretty-tricky house hunt a little more tolerable, we’ve built this resource of information on mortgages. We’ll cover the difference between a fixed and variable mortgage, how the interest rate works in Canada and figure out which mortgage is your financial best friend.
Raising interest rates makes it more expensive to borrow and typically cools off economic activity and price increases, which helps tame inflation.
What does inflation mean for interest rates in Canada right now? Interest rates are on their way up. And with that, it becomes pricier to borrow for a mortgage. Probably not what you want to hear, if you’re anything like the worried Canadians buckling down for economic roadblocks in 2023.
According to PolicyMe's Canadians and Money survey, 30 per cent of Canadians reported that they were worried about inflation. It’s predicted that inflation rates will stay at their elevated rate until 2023.
Currently, the Bank of Canada is holding their rates at 0.25 per cent, pressing pause on planned increases intended to control inflation, “a rate it adopted in a drastic drop in the early days of the [...] pandemic.” says Global News. But rate hikes are likely not far off.
The central bank’s overnight rate remains at 0.25 per cent, a rate it adopted in a drastic drop in the early days of the COVID-19 pandemic.
To put yourself in the best possible position to borrow for a mortgage, we’ve specced out some key considerations for prospective Canadian homebuyers. Here are some common scenarios and how to tackle them while rates are still budget-friendly:
Do you want to ride the ups and downs of a variable mortgage that fluctuates with the economy?
Or do you want the reliability of a fixed mortgage that locks you into a rate for the life of your mortgage term? (Love a thrill ride? Choose variable. If you’re a control freak, fixed is going to feel way more comfortable).
According to Angela Calla, a BC-based mortgage broker and author of The Mortgage Code:
“If you or a loved one has a mortgage renewal in 2022 you will want to renew it in the first quarter of the year.”
Why? Because rates are low right now and the Bank of Canada plans to hike rates later in the year – think as early as spring time.
The headlines are clear: variable mortgages are usually cheaper than fixed mortgages right now. And currently, they’re a lot cheaper.
When comparing the lowest rates available from the big five banks, a 5-year fixed rate is 2.75% compared to 1.25% for a variable rate.
In today’s economic climate, the difference between a fixed and variable mortgage is about finding a match for your personality – and risk aversion. Let’s take a look at general break down of fixed mortgages and variable mortgages.
The interest rate of a fixed mortgage is locked in for the length of your term. More specifically, the amount of your payment never changes and how it’s divvied up towards paying your interest and principal stays exactly the same.
You can choose between an open mortgage (that won’t financially ding you when you break a mortgage or pay it off early) or a closed mortgage that comes with a cost to breaking up before your term is over.
The interest rate of a variable mortgage or adjustable-rate mortgage (ARM), fluctuates with the prime rate which The Bank of Canada is in charge of establishing. While your payment doesn’t change, how it’s used will fluctuate.
When interest rates go down, more of the payment is used to pay down the principal, and if rates go up, more of the payment is used to pay interest.
There are pros and cons to both fixed mortgages and variable mortgages. A mortgage specialist can help guide you towards which option is the best fit for your budget, lifestyle and personality.
To round out this guide, we sat down with a mortgage expert at nesto to talk about the decision-making process. nesto is a mortgage solutions provider, dedicated to empowering people with a transparent property financing experience.
We sat down with Mortgage Advisor at nesto, Serge Lessard, to chat about considerations for choosing the right kind of mortgage:
“Deciding what type of mortgage to choose involves a thorough analysis of needs, objectives and risk tolerance. Focusing only on the best mortgage rate without looking at the big picture could turn into a nightmare.
Too often borrowers rely on the lender qualification criteria without considering their budget. Many expenses are not considered in a lender qualification therefore reviewing the family budget is an absolute must before deciding to move forward.”
For starters, it might helpful to ask yourself: do you want to ride the changing prime rate and move before your mortgage term is over? Then you might want to sign onto a variable mortgage.
Here are some quick specs about variable mortgages:
Do you sweat the small stuff and don’t plan to move during your mortgage term?
Then pick a fixed mortgage. Here’s what you need to know about fixed mortgages:
Here’s a quick snapshot of what to expect from each type of mortgage when it comes to interest and penalties:
Money is never free to borrow (lenders need to make money somehow, right?) and the same goes for your mortgage loan.
And there’s nothing random about published interest rates.
As of Q1 2021, the average outstanding mortgage balance is just over $250,000 in Canada. And the interest rate on these mortgages vary pretty widely, from 1.6-5.1%.
With the average cost of a home in Canada clocking in at over $700,000, increasingly pricey homes are setting new mortgage trends.
According to our Canadians and Money survey, 61% of Canadian families seeking homeownership believe that there are not enough affordable options available, followed by 56% saying that they struggle to save enough for a down payment.
To get an idea of what the landscape of mortgages in Canada looks like right now, here are some highlights from the Canadian Mortgage and Housing Corporation’s latest residential mortgage industry report:
It’s fair to say we’re collectively obsessed with paying off our mortgages sooner than later. In a consumer report by Mortgage Professionals Canada, it was found that the average amortization among Canadian mortgage holders is 20.6 years and the maximum amortization is 25 years.
The question remains; which mortgage is better? It’s kind of like a chess match and here are some truths to help guide your next move:
To help give you an idea of how fixed and variable interest rates have fluctuated over the years, check out the graph below.
There’s unfortunately no catch-all approach to choosing a mortgage. But to help you weigh your options we’ve created a list of what to think about before committing to a mortgage.
What’s an even better idea? Review this list with a mortgage specialist who can bring the numbers and cents alive for you.
We polled our office to see which kind of mortgage was the most popular and why. Across the board, everyone said they had a fixed mortgage.
Here’s why most of us choose a fixed mortgage over a variable mortgage:
We love our work because we help Canadians understand life insurance in a simple and uncomplicated way. Even if that means letting you know that you don’t need life insurance right now.
But as a general rule of thumb, we typically recommend that people consider getting a life insurance policy if they hold a mortgage to help protect your family with coverage in case you pass away.
The last thing you want to leave them with is a mortgage they can’t afford to pay for.
A fatal illness may be reason to purchase a CI policy. We recommend using a critical illness calculator to find out your premiums and to ensure you're getting the coverage you need for your fixed or variable mortgage.
If you expect to pay off your mortgage in 20 years, consider a 20 year term life insurance policy. If something happens to you within the life of the policy, your loved ones will receive a benefit that will help pay for the mortgage, your little one’s future education and so much more of your family’s day-to-day expenses.
Having a variable insurance rate also means fluctuations in interests and monthly payments. With fluctuations also common in the average cost of life insurance in Canada it is important to create a budget that allows you financial flexibility. Go to PolicyMe to get a free insurance quote online.
It's important to consider your individual financial situation and goals. Additionally, don't forget about the importance of securing your family's future with life insurance without medical exam.
To be able to afford your mortgage in the event that you or your partner dies, we suggest getting last to die life insurance to avoid any complications in the event that you can't afford your insurance.
Life insurance for seniors over 70 in Canada doesn't have to be expensive. Visit PoliyMe to get coverage at a rate you can afford.
Use the life insurance estimator to get the best rates.
Term life insurance gives you financial security during the years when you really need it. And because all families are different (and mortgages, for that matter!), we empower you with the tools you need to personalize your policy.
Recommended reading: Mortgage Insurance versus Life Insurance