Undestanding Mortgage Rates: A November Market Update
Current Mortgage Rate Trends
Fixed Mortgage Rates
In recent weeks, one-, three-, and five-year fixed mortgage rates have been relatively stable. However, it’s crucial to note that they have levelled out at rates that, in some cases, haven’t been this high since 2008. For example, the average posted rate for a one-year fixed-rate mortgage, according to the Bank of Canada, was a staggering 8.09% as of October 18. Three-year fixed mortgage rates, at an average of 7.14%, appear more attractive, but they require borrowers to pass the stress test at a challenging 9.14%.
While five-year fixed mortgage rates remain the more affordable option, it presents a dilemma for mortgage shoppers. If rates are expected to decline in the next year or two, a five-year term might not seem very attractive. However, shorter-term options may be too expensive for many borrowers to qualify for. The good news is that your bank’s posted rates can often be negotiated down, and they should be closer to the rates found on mortgage rate comparison tables. As of October 18, some lenders were still offering five-year fixed rates below 6%.
Variable Mortgage Rates
Variable mortgage rates have been on the rise, with numerous increases since March 2022, amounting to 475 basis points. Although the Bank of Canada held its overnight rate at 5% on October 25, variable mortgage rates remain unattractive. With inflation ticking down and employment growth slowing, the bank’s series of rate hikes may finally be showing results. However, don’t expect a reduction in the overnight rate or variable mortgage rates until well into 2024.
Advice for Mortgage Shoppers
Fixed Mortgage Rates
Given the current trend in fixed mortgage rates, it’s unlikely that we will see a significant decline in the last part of the year. Three- and five-year government bond yields, which influence fixed mortgage rates, are currently higher than they’ve been since 2007. As long as these yields remain elevated, fixed mortgage rates are likely to stay on the high side. Therefore, if you’re considering a fixed-rate mortgage, it’s wise to secure one sooner rather than later, as rates may continue to rise.
Variable Mortgage Rates
For those contemplating variable-rate mortgages, it’s essential to monitor the Bank of Canada’s decisions closely. The bank will only consider reducing the overnight rate once they are confident that inflation is moving toward their target rate of 2%. With inflation at 3.8% in September, nearly double the bank’s target, it’s unlikely we will see a reduction in variable mortgage rates soon.
Broker vs. Bank: Who Offers the Best Mortgage Rates?
Choosing the right avenue to secure a mortgage can have a significant impact on the rate you receive. When deciding between working with a lender (such as a bank) or a mortgage broker, consider the following:
Mortgage Brokers: These professionals can provide a wider array of options because they aren’t tied to a single financial institution. Brokers can obtain offers from multiple lender partners, including B lenders and private lenders, in addition to major banks. They also have a strong incentive to negotiate the best possible rate for you since they only earn a commission when a mortgage is finalized.
Banks: Bank employees have revenue targets to meet, which may not align with your best interests. While banks can offer competitive rates, their offerings are limited to their products, potentially missing out on more favourable options available through brokers.
Staying informed about the current mortgage rate trends and making a well-informed choice between fixed and variable rates is vital. Additionally, leveraging the expertise of a mortgage broker could be advantageous in securing the most favourable mortgage rate tailored to your financial situation and homeownership goals. Remember that while rates have been on the rise, it’s still possible to find a competitive mortgage rate that suits your needs. If you are struggling with mortgage payments due to higher rates, do not hesitate to reach out to your lender or mortgage broker for assistance and payment flexibility options. The mortgage market can be complex, but with the right information and guidance, you can make the best financial decisions for your future.
How to Get the Best Mortgage Rate
Boost Your Credit Score
A credit score of 680 or higher will help you get approved for a mortgage at most Canadian lenders. The longer the list of lenders willing to work with you, the more mortgage offers you’ll have to choose from. The increased choice gives you a little more control over what your loan will cost and a better shot at being offered the best mortgage rate.
Before applying for a mortgage or mortgage pre-approval, check your credit score and see where it stands. If there are some financial habits you can tweak to improve your credit score, get tweaking. And if you’re stuck for ideas, reach out to your bank’s financial advisor, a mortgage broker, or a credit counsellor to get some ideas from a professional.
If your credit score is below 680, you should still be able to apply for a mortgage with a B lender, but a B lender mortgage might come with significantly higher interest rates.
Pay Down Debt
Paying down your credit balances can also help reduce the mortgage rate you’re offered.
If you’re carrying significant debt from a credit card, personal loan, or line of credit, lenders may have legitimate concerns about your financial decision-making or your ability to pay for a mortgage. Any risk they see in your debt service ratios or credit history could give them a reason to offer you a higher rate.
Choose Between a Fixed-Rate and Adjustable-Rate Mortgage (ARM)
You’ll have to make several decisions when it comes to choosing among the types of mortgages available when you are planning to buy a house. From a financial perspective, one of the single most important choices you’ll make is between a fixed-rate mortgage and a variable-rate mortgage.
With a fixed-rate mortgage, the amount of your payment will stay the same over the loan term. That means your lender is making a very large loan to you whose terms can’t be changed for the next 15 – 30 years. Even if interest rates skyrocket, your fixed-term loan payments won’t change.
Because lenders are taking all of the risk that interest rates will rise when they make a fixed-rate mortgage loan, they charge more upfront. There’s a big difference between 15- and 30-year fixed rates as well, which reflects that lenders are assuming that risk for twice as long.
Variable-rate mortgages work a bit differently. They typically start with a lower rate. This initial rate remains fixed for the first several years of the loan, typically a period of 5, 7, or 10 years. After that, the rate will periodically adjust up or down according to the market.
Because you can end up paying much more in interest rates, you are sharing with your lender the risk that interest rates will go up. That’s why they can afford to offer the introductory rate to entice new home buyers.
Whether you’re dealing with a big bank or a small alternative lender, don’t accept the first-rate offer you’re presented with.
Negotiating is a must during the mortgage process. Even if your lender isn’t willing to decimate its rate offer for you, getting a little shaved off your rate can make a significant difference.
Understanding mortgage rates and making informed decisions about the type of mortgage you choose can have a significant impact on your financial future. While the current mortgage market is witnessing rising rates, there are still opportunities to secure competitive rates by improving your credit score, paying down debt, and negotiating with lenders. Whether you opt for a fixed-rate or adjustable-rate mortgage, the key is to stay well-informed and make choices that align with your financial goals.
Are you on the hunt for the perfect mortgage to finance your dream home? Look no further! As your trusted mortgage broker, we’re here to guide you through the current market trends and help you secure the best possible rate tailored to your unique needs.