Should you buy now? Switch? A broker breaks it down
In June, financial history was made: a bank set its five-year fixed rate at 1.99% for certain mortgages, the first time a lender has dropped the rate below 2% for Canadians.
“These are the lowest rates that we’ve ever seen in history,” says Renée Stribbell (Human Resources ’97), a mortgage broker and co-owner of Platform Mortgage. They’re the result of an economy struggling through a pandemic, and an attempt to stimulate investment.
“The closest we can compare it to is 2008, when we had the housing market crisis,” Stribbell adds. “I’ve been telling my clients it’s reasonable to expect rates to stay low for the next 12 to 24 months.”
What does that mean to potential buyers and current owners? Buy immediately? Or, get out of your existing mortgage? We asked Stribbell how to make the most of a new low.
Buy now, pay less
At the height of Canada’s runaway inflation of the early 1980s, the average five-year fixed rate crested at 21%.
“Under 2% for a mortgage is hardly any interest, really,” says Stribbell, who’s been a broker for 17 years. It’s her job to work on behalf of her clients to find lending rates and terms that best suit their needs.
“I joke, but they’re basically getting the mortgage for free.”
Even small rate drops can make a big difference.
Even small rate drops can make a big difference for people looking to enter the housing market. Stribbell uses an example of a $300,000 mortgage. At a fixed rate of 3.19%, monthly payment is about $1,450. At 1.99%, the payment is about $180 less.
“That’s significant enough to make a difference. It’s lower than most renters are paying.”
Break the bank (loan)?
Current mortgage holders in search of lower rates might benefit from a switch, but they must consider payout penalties – the fee for getting out of your mortgage before the end of the term – attached to their contract. “Sometimes it’s worth it,” says Stribbell.
That’s due to the variations in the penalties from one mortgage to the next.
Consider a homeowner who got a $400,000 mortgage at a five-year fixed rate of 3.4%, making monthly payments of $2,000. At the end of the five-year term, their balance will be about $343,000. They will have paid $57,000 against the principal, and $63,000 in interest. It will take 20 years to pay that off, and the total interest over the length of the loan would be $190,000.
Now, assume you had three years left on your mortgage and owed $340,000, says Stribbell. At a similar rate of 3.34% and the same payments, the remaining interest over the next three years would be $32,000. What if you broke the mortgage to chase that 1.99% rate?
It would cost you a $6,600 penalty but, if you kept your payments the same, you would save more than $13,000 in interest and reduce your amortization from 19 years to 17. In fact, even a rate of 2.09% would make a difference worth breaking the mortgage over, says Stribbell.
It will take 20 years to pay that off, and the total interest would be $190,000.
Earlier in a term, the penalties for payout are typically higher, meaning the numbers can work against you. Also, breaking the mortgage contract often requires changing lenders, which involves time, paperwork, new credit checks and administration fees. It’s worth having a professional to help you figure out if it’s all worth the hassle.
Pore over the fine print
Stribbell says it’s essential to know exactly what you’re signing up for.
“You might get 1.99% today,” she says, “but you might be facing a much larger payout penalty because of the way that it’s calculated.”
Here are some of the crucial questions Stribbell says people need to ask, to be sure they’re getting to mortgage that’s right for them, with no surprises:
- How is the penalty calculated if I want to pay out early?
- If I paid it off early, are there additional fees or charges on top of the penalty fee?
- Is the rate portable to a new property if I sell my house within the five-year term?
- How much extra can I pay down every year? Some mortgages have restrictions on that.
- Can I pay biweekly instead of monthly? Doing so lets you make two extra payments per year.
Act now – but not rashly
“If it’s the right time for you, if you feel comfortable and stable in your job, you’ve got your down payment, you’re comfortable with the payments, it’s an absolutely great time to purchase a home,” says Stribbell.
"It’s an absolutely great time to purchase a home.”
“You’re going to get an amazing interest rate; you’re going to have your payments low. Housing prices are good – I suspect, yes, they’ll come down, but you can still buy a house for a good price.”
And if it’s time for a new mortgage, take the time to consider your options. “Do not just take the renewal rate that your current lender has sent to you,” says Stribbell. “Always shop around and get a second opinion.”