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The ease with which people can obtain credit is important for the health of a country’s economy. When times are booming within an economy, you tend to see interest rates start to move upward. The banks realize that most borrowers can afford to pay a bit more, and so they start to charge a bit more for the right to that money. Businesses are not as worried about the high cost of taking out loans, because they believe that their incoming revenues will enable them to pay for the money they have taken out.
Average Mortgage Rates in Canada
However, when times get hard, many times a country’s central bank will decrease the prime rate of lending. The purpose of this is to make borrowing accessible to more people, so that they will keep spending. At the present time, for example, if you want to take out a five-year variable rate loan in Canada, you can expect to find (with solid credit) a rate around 3 percent. That same term for a fixed rate loan is still available for less than 5 percent interest. The reason why rates are so low is that the Canadian government is still trying to encourage spending in the housing market. The collapse of the housing market in 2008 and 2009 led to a number of changes in the real estate and mortgage industry. In order to keep their licensing from the government, traditional lenders had to agree to put a number of rules in place regarding borrower qualifications, the approval process and calculating people’s ability to pay their loans on time.
Mortgage Rates in Canada
Looking at the past few years, it is instructive to look at the ways that interest rates have fluctuated in Canada since 2004. The fluctuations reflect the economic changes taking place in the country, and the government’s attempts to respond to them in a positive way. The changes that the 2008/2009 housing collapse wrought have helped banks increase their security, but they have also made credit more difficult for people to obtain, to the point that the difficulties are counteracting the benefits that low interest rates are bringing to those who can qualify for traditional financing.
Between 2004 and 2014, the average five year variable rate mortgage in Canada has charged interest as high as 6.10 percent, in 2007, and as low as 2.42 percent, in 2009. The high point, in 2007, came right before the spectacular collapse of the housing industry. At that time, prices were high, and interest rates were inching up as well, because people had the money to afford loans at those rates. The average rate dipped to 4.79 percent in 2008 and then the 10-year low in 2009, followed by 2.60 percent in 2010. The purpose of this was to encourage as much spending as possible in a mortgage market that was still suffering from the crash a few years before. The average rate has sat at a constant 3.00 percent since 2010.
Looking at the fluctuations in the five year fixed rate loan shows a similar time frame for changes. The high point for average fixed rate loans occurred in 2008, at 7.10 percent. Remember, fixed rate loans cost more in interest than their variable counterparts, because the bank has to accept that their money will be coming back to them at that rate for the whole life of the loan. In situations like the current market, when rates are likely to go up in the future, the bank is sacrificing potential future earnings for guaranteed present earnings. The low point for the average five year fixed rate since 2004 is taking place now, as the average 2014 rate is 4.97 percent. In 2004, the average sat at 6.29 percent, floating in the sixes and sevens until the housing collapse. Fixed rate loans took longer to drop in interest than variable rate loans, in part because variable rate loans became very difficult to sell in such an atmosphere of uncertainty as that which followed the housing collapse.
Looking at the average rates for shorter term loans, such as one and three years, shows that the high point almost always occurred in 2007, in the months leading up to the housing collapse. Rates continue to remain at historic lows in the hope that it will encourage people to borrow.
One reason why mortgage revenues remain somewhat flat for banks, though, is that the lending requirements are keeping many potential borrowers out of the market. The requirements for income verification and credit scores are simply not attainable for quite a few borrowers who nonetheless have the means to pay for a mortgage.
If you have questions about your own loan situation, give one of our financing specialists at Amansad Financial a call today.
Mortgage Rates Comparison Canada
If you are looking to purchase a home, the first number that will concern you is the price of the property. However, a number that is just as important is the interest rate. While the price is much larger (and therefore more significant to many people), the interest rate is crucial, as it plays a role in how much your home purchase will actually cost you.
Consider a $250,000 mortgage. At 4 percent, amortized over 20 years, that mortgage will actually cost you $363,588.20, as you pay $113,588.20 in interest. However, what if your interest rate were 6 percent? That doesn’t sound a whole lot higher, as 6 is only 2 more than 4, but it’s also a 50 percent increase. You’ll pay $429,858.64 over those 20 years, with $179,858.64 in interest. That’s a difference of more than $66,000. Is there something you could do with that $66,000? Absolutely — which is why you want to shop around for the best deal possible. Also, when your mortgage comes up for renewal, you’ll want to check around for lower rates.
Canadian Mortgage Rates Comparison
One decision that you will want to make is whether to ask for an open or closed mortgage. If it’s closed, you’ll get a lower rate, but you don’t want to pay it off early, because you face a fairly substantial penalty. The shorter the term, the lower the interest rate as well, because the bank isn’t tying its money up with you as long. You can get a one-year closed mortgage for 2.89 percent in Western Canada, and the two-year note is even cheaper, available at 2.34 percent. These both represent fixed rate loans, which means you pay the same interest rate for the whole life of the loan.
Comparing Mortgage Rates in Canada
If you need a slightly longer fixed rate loan, you can get terms between three and five year terms for a closed mortgage between 2.64 and 2.74 percent. If you want a longer note than that, the rates start to climb. Six and seven year terms are available at 3.79 percent, but after that the rates go well over 4 percent. A ten year term is available at 4.29 percent.
If you have room in your budget for a little risk, you might consider a variable rate loan. In most cases, you get a set rate for the first year, but after that, the rate can go up if the market rates have gone up. You can get a three year term for 2.35 percent and a five year rate at 2.19 percent. You might notice that the gap between fixed and variable is not that large, though, so you will want to run the numbers for both scenarios before making up your mind for sure.
Open mortgages cost a bit more, and they are only available for shorter terms (one to five years). With these, you can pay the note off early without any penalty. A one year open mortgage is available for 4.99 percent (fixed), while three year and five year open variable loans are available for 4.00 and 3.50 percent, respectively.
At Amansad Financial, about 90 percent of our transactions do not go through banks. For the casual homebuyer, the bank is the first place he thinks to go to look for a loan. However, brokerages often end up linking buyers with loans at a lower interest rate. Most of our business, though, goes to people looking for alternative lending solutions.
How do these work? Traditional lenders are usually looking for a specific credit score, income history and down payment. There are a lot of people with the wherewithal to pay for a home loan but who do not have the requirements the bank is looking for. One common example is a couple with a 30 percent down payment saved up but a checkered past when it comes to credit score. We end up connecting many of these clients with private lenders.
Private lenders are companies or individuals who are looking to provide mortgages as an investment for themselves. They want returns that are higher than savings accounts but with less risk than stock or commodities. They will generally charge higher rates and have shorter terms than many traditional lenders, but they also aren’t as particular when it comes to the lending requirements.
If you are looking for a house and have 25 or 30 percent to put down, call Amansad Financial today to find out the current rates that private lenders are charging. We have helped hundreds of clients with this process, and we can help you as well!
How Mortgage Interest Rates Work in Canada
When you look at a mortgage amortization statement, one thing that may stand out to you is the way in which your monthly payment is divided between interest and principal. In the first year or so, the vast majority of your payment goes to pay for the interest, with just a small amount paying down principal. Each monthly payment should show slightly less in interest and slightly more in principal, but if you took out a closed mortgage (meaning that you cannot pay extra principal early in many cases), you will go several years without making a significant dent in your principal, especially if you asked for an amortization longer than 15 years.
Understanding how interest is calculated on a mortgage
The longer your amortization period, the lower your monthly payments will be. However, a longer amortization period means that you’re going to pay more in interest over the life of the loan. Here’s an example – if you take out a $500,000 mortgage at 6% with a 15-year amortization period, your monthly payment will be $4,219.28. You’ll pay a total of $759,471 over the life of the loan, which means that your interest expense (total less principal) is $259,471.
But what if you take out that same note, at that same rate, with a 30-year amortization period? You’ll pay less per month — $2,997.75. However, over the life of the loan, you’ll pay a total of $1,079,191 – which means that the interest expense ($579,191) is actually greater than the principal.
In the 15-year scenario, your first payment covers $1,719.28 in principal, and $2,500.00 in interest. In the 30-year scenario, your first payment covers just $497.75 in principal – and that same $2,500.00 in interest. So you can see that, in a 30-year note, it takes you a lot longer to start building equity in your home – the difference between the current appraised value and the amount that you still owe on your mortgage.
This model assumes a fixed-rate loan, of course. In Canada, no loan term can go longer than 10 years, but the longer term you ask for, the higher your interest rate will be. You can also apply for an adjustable-rate loan, which varies with market conditions. You can often take these out at a lower rate than a fixed-rate loan, because you’re willing to take on the risk that rates will go up later.
Most adjustable-rate loans come with a cap on fluctuations, and they have restrictions on how often the interest rate can be adjusted. To build business on this type of loan, some lenders will offer low rates over the first year or so of the loan and then build in frequent changes, as often as annually. If you’re only planning on staying in your house for a couple of years, this can be a better deal than a fixed-rate loan.
Another option is an interest-only loan. This allows you to pay just the interest on the note for the first several years, and if you think that you are about to come into a higher salary range, you might think about this type of loan. If you also know that you will only owe the home for a short time and plan to sell it before the principal payments kick in, that’s something to consider as well.
The Prime Interest Rate in Canada
Within Canada, the prime lending rate is the mean interest rate that commercial banks charge on loans to companies. Rates for mortgages, auto loans, credit cards and other forms of debt change when the prime rate changes, and so when the prime rate goes up or down, these other rates will fluctuate as well. Currently, the prime mortgage rate in Canada has been 3 percent since October 2014. The reason for this low rate is that with easier access to credit, more people are likely to invest, meaning more economic development for everyone. The housing collapse in 2008 and 2009 sent people fleeing the housing market, both because they were foreclosed from it and because values plummeted, and those who could not jettison their properties before the fall wreaked havoc with their values saw their mortgages go upside-down. These two events led to a great deal of fear in the real estate market, and the purpose of a low prime rate is to lure investors back in so they will take out credit, not just for mortgages but for other investment vehicles as well.
Canadian Prime Interest Rate
Between 1935 and the present day, the prime rate has spent most of the time at or below 6 percent, beginning at 5.5 percent in 1935 and quickly dropping to 5 percent; it would not climb again until 1956. Rates would stay close to 6 percent except for a brief jump to as high as 8.5 percent between 1968 and 1971, and then they would skyrocket all the way up to 22.75 percent in 1981, reflecting a similar jump in rates that happened in the United States. Indeed, south of the border, American presidential candidate Ronald Reagan’s campaign team came up with the “misery index” (adding the unemployment rate to the prime interest rate to show how poorly the incumbent, Jimmy Carter, was doing when it came to managing the economy). The prime rate has been below 10 percent since 1992, though, and it has been at or below 3 percent for more than five years at present.
If you are looking to buy a home, interest rates are at historically low levels, and so if you can take advantage of them while the banks are still trying to spur economic activity, you will walk away with an amazing deal in terms of interest rate, compared to people who were buying homes 15, 20 and especially 30 years ago. If you are curious about how to begin the process, talk to one of our specialists at Amansad Financial. We have connections with a wide range of lenders to give you a number of options. We look forward to helping you find — and purchase — the home of your dreams.