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The Effect Of Coronavirus On Canadian Mortgages
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Every time you watch the news, it seems that the issues surrounding the coronavirus are worse than the last time you turned on the TV or radio. And you’d be right. Seemingly changing by the hour, the coronavirus pandemic is literally shutting down many of the most important aspects of our lives.
People are cancelling travel plans, bans are in place for travel between countries, businesses and schools are shutting down, and people are being told to distance themselves from one another in an effort to contain the spread of the virus.
It sounds scary, and it is. The question is, how will the coronavirus affect the Canadian economy? And more specifically, how will it impact mortgages?
Before we dig deep into how the coronavirus is affecting the world’s economy and our health, let’s define what it is first. According to the World Health Organization (WHO), coronaviruses are a family of viruses rather than just one specific virus and begin by transmission between animals and humans. These viruses affect the respiratory system and cause symptoms that may range from mild (like a cold) to much more severe (like pneumonia).
Previous coronaviruses that affected parts of the world include Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The latest coronavirus is referred to as COVID-19 and is a new strain that hasn’t yet been seen in humans.
How Coronivirus is Affecting the Economy
As if the horrible effects of this recent virus on world health weren’t bad enough, it’s also significantly affecting the economy. It continues to be a growing threat with no end in sight that has caused stock markets to crash, businesses to lose major profits, and supply chains to stall.
Amid the spread of the virus, oil prices have plummeted. In fact, prices have dipped so low to levels not seen in nearly 30 years. And as the coronavirus affects oil price markets, fuel prices across the country are declining at the same time. Some gas stations are fueling cars for as low as 80 cents in Toronto. And it’s expected that gas prices could tumble another 10 to 15 cents by next week.
There are real concerns that the coronavirus will lead to a recession in Canada, as well as in other countries around the world. In response, the Bank of Canada slashed its key interest rate by a half percent to 0.75% this past week in addition to the half percentage point cut the week before.
It’s a very fluid situation that seems to change by the hour, so it remains to be seen how much the economy in Canada and across the globe will continue to worsen.
While people might be nervous about travelling and even leaving their homes, it’s not stopping the real estate market from bustling. In fact, it’s expected that this spring’s housing market will be a particularly hot one, especially with mortgage rates as low as they are. And with the central bank’s recent rate cuts, even more mortgage applications may be filled out this spring.
People may be worried about the coronavirus, but many are also worried about missing out on the chance to lock in a very low-interest rate, and the housing market is already seeing the effects of this. Although a virtual halt in travel from China may have reduced foreign buyers and slowed sales in Vancouver, the real estate market in other parts of the country – like Toronto – are seeing opposite effects.
While financial markets are slumping, real estate markets are soaring. Home sales were up 47% in the first week of March compared to the same month last year, and average home prices increased by 18%. Those are some hefty numbers considering what’s transpired over the past few days.
Mortgage Buyers: Variable or Fixed Rates?
For those who are joining the ever-increasing bandwagon in terms of buying homes this spring and taking advantage of low rates, choosing the right mortgage program might be a confusing situation. But the current coronavirus pandemic might actually make the decision to choose one program over another a little easier.
Considering the Bank of Canada’s recent rate cuts, fixed-rate mortgage rates are falling, making these types of home loans very attractive.
Traditionally, variable-rate mortgages would offer borrowers lower rates during their introductory period. But these days, it’s not unusual for buyers to be able to lock in fixed-rates that are even lower than those of variable-rate mortgages.
Currently, fixed rates are as low as 2.59% for prime borrowers. That’s incredibly low given the history of mortgage rates and certainly makes now a potentially good time to buy and save tens of thousands of dollars or more in interest paid over the life of your loan.
Should You Choose a Variable or Fixed Rate?
Go with a variable-rate mortgage if you:
- Manage to get a rate that’s lower than a fixed rate for the introductory period
- Are planning to move out of your home before the introductory period ends
- Have an appetite for risk when the introductory period is over and the rate adjusts
Go with a fixed-rate mortgage if you:
- Are well-qualified with a good credit score and low debt-to-income ratio
- Are planning to stay put in your home for the long haul
- Like the idea of your mortgage rate remaining unchanged throughout the term of your loan
- Work with a lender that publicly posts low fixed rates so you can time your lock-in when the introductory period is over
The coronavirus has quickly become a global concern. Not only is it posing a serious threat to our health, but to our economy as well. That said, it seems to be having somewhat of a positive effect on mortgages and real estate thanks to the incredibly low-interest rates that have resulted.
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