Canadian Mortgage Rate History
If you’re in the market to buy a new home and take out a mortgage, then you’ll be very interested to know what mortgage interest rate you’ll be offered.
After all, mortgage rates will directly influence how expensive or affordable your mortgage will be. Obviously, lower rates will translate into a more affordable mortgage, and vice versa.
To understand mortgage rates a little better, it’s helpful to be familiar with the Bank of Canada’s overnight rate and prime rate, as they impact the interest rate that borrowers will be charged when they apply for a mortgage.
But what exactly is the “overnight rate” and “prime rate?”
Prime rate – When you apply for a mortgage with a variable rate (which means the interest rate will change at various intervals throughout the life of your home loan), the lender will provide you with a rate that’s associated with the Bank of Canada’s prime rate.
Basically, the prime rate (also referred to as the “prime lending rate”) serves as the foundation upon which other rates – including those for mortgages – are based on. When the prime rate increases or decreases, so does your mortgage interest rate.
Right now, the prime rate in Canada is 3.95%. The prime rate is the annual interest rate that the major banks in Canada use to set their interest rates for variable-rate mortgages and lines of credit. It’s heavily influenced by the Bank of Canada’s target for the overnight rate.
Overnight rate – The overnight rate is what the Bank of Canada charges other banks when lending money on an overnight basis. Any changes that are made to this rate have an effect on other interest rates, including mortgages.
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How Does the Prime Rate and Overnight Rate Impact Mortgage Interest Rates?
When you apply for a mortgage, you have a choice between a fixed or variable-rate mortgage. A fixed-rate mortgage simply means that the interest rate you lock in will remain stable throughout the entire mortgage term. No matter what happens with the prime or overnight rate, your interest rate will not change.
On the other hand, a variable-rate mortgage means the rate will be adjusted at various intervals throughout the mortgage term. This particular rate is expressed as the prime rate plus or minus a percentage. As the prime rate fluctuates, so will your mortgage rate.
While variable-rate mortgages typically feature a lower introductory rate than fixed-rate mortgages, it could increase and even go higher than the fixed rate. If that happens, you may be allowed to convert your mortgage to a fixed-rate mortgage, but you’ll need to pay the fixed rate when you make the switch.
Should You Choose a Variable or Fixed-Rate Mortgage?
The decision about which type of mortgage to choose will depend on your situation and what the outside rate market is like.
For example, if rates are expected to increase soon, you may be interested in locking in a lower rate today with a fixed-rate mortgage. That way you can shield yourself from rising rates. This type of mortgage is also suitable for borrowers who don’t have much of an appetite for risk and like the idea of having stable mortgage payments that won’t change throughout their term.
On the other hand, if you can snag a rate that’s significantly lower with a variable-rate mortgage compared to a fixed-rate mortgage, that may be the way to go. This is especially true if you plan to sell before the introductory period is over. That way you can take advantage of the lower rate. And by the time the introductory period expires, you’ll have moved on to a new mortgage.
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How to Choose Between a Long or Short-Term Mortgage
In addition to choosing between a variable-rate versus a fixed-rate mortgage, there is also the choice between a long or short-term mortgage to make. So, which one is better for you?
Short-term mortgages. Amortization periods of 5, 10, or 15 years are generally considered short-term. The great thing about short-term mortgages is that the overall cost is significantly lower than long-term mortgages. That’s because you’ll pay it off much sooner and therefore pay a lot less in interest over the long run. Plus, you may be able to take advantage of lower interest rates compared to long-term mortgages.
That said, short-term mortgages come with higher monthly payments to pay off the entire loan amount in a shorter time frame. These payments can be far too much for many borrowers to handle and fit into their budget.
Long-term mortgages. Amortization periods of 20 years or more are considered long-term. These tend to be more popular among borrowers for the simple fact that the monthly payments are much lower. This makes these types of mortgages easier to afford.
That said, long-term mortgages often come with higher interest rates compared to short-term mortgages. In addition, the overall cost of the mortgage will be a lot higher than short-term mortgages.
Are Mortgage Rates on the Rise?
On March 6, the Bank of Canada did not change its prime rate, as was expected. According to economic data collected over the recent past, the economy across the nation weakened somewhat. Over the last quarter of 2018, the Canadian economy hardly made any gains, largely as a result of the national housing slowdown.
Since the economy is at a lull right now, the Bank of Canada may have decided to keep rates where they are until things start to pick up again in the near future. That said, this doesn’t mean that the bank won’t increase rates at some point in 2019. Should that happen, borrowers will have to pay more for their mortgages, as a rise in the prime rate will also mean a rise in mortgage rates.
The central bank will be making its next interest rate announcement on April 26.
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Is Now the Right Time to Buy?
If you’re waiting around for the perfect time to buy based on what mortgage rates are doing, you could be waiting forever. There really is no “perfect” time to buy, but rather there are more appropriate times for each individual buyer based on their unique situation.
If you’re thinking of buying a home soon, consider your particular situation, needs, and financial profile. With rates still rather low compared to years past and the expectation of rates climbing at some point this year, now might be a great time to commit to a home purchase.
Let Loans Canada help you get in touch with the right lender who can offer you a mortgage with terms and rates that are best suited for you.
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