Canadians have the option to choose between a 1-year, 3-year, 5-year, and 10-year terms when they are applying for a mortgage loan. Further, as we all know, we can opt for either fixed or variable rates. Fixed rates are the preferred variant with Canadians, and the majority (ca. 66%) usually picks a 5-year term.
Canadians like to play it safe; and even if some analyses proved that variable rates might be a better option, in the long run, it is hard to enter that risk since the uncertainty, especially, nowadays, is simply too high.
The economy is constantly changing which also has a major impact on the real estate market, and the rates offered by different banks and non-banking mortgage lenders are driven by the economic state of play. Let us take a look at how things looked in Canada since 2007 and how much the fixed mortgage rates have changed. Our chart excludes ten-year period rate since they are not very popular in Canada.
Fixed Mortgage Rates in Canada (2007-2017)
|Year||1-Year Rate||3-Year Rate||5-Year Rate|
The fluctuation of the interest rates is a reflection of how the economy is doing. When things are going south, the banks usually lower the rates in order to still attract customers and keep the money coming in, even when times are hard and challenging. The table above shows that in 2007, the mortgage interest rates were very high, which simply was a result of the housing boom right before the onset of the financial crisis. People had easy access to money back then, and it was only natural that they could afford a mortgage interest rate above 7%.
The crisis year 2008 saw a decline, but the first significant drop was recorded in 2009 when the rates decreased by around 2% for all three mortgage terms.
The average mortgage rate has hit an average 3% low since 2010, and it is still in place. The lowest prime rate was recorded in 2009, and it stood at 2.25%, while the highest prime rate stood at 6.25% (the year 2007).
The last five years have witnessed a struggle in fluctuation as the prices kept going up and down for all three mortgage terms. The consequences of the crisis can still be felt, and the rates are kept low to attract more buyers, and yet somehow, we are being told that future outlooks look promising and that the rates will increase, especially, since the Canadian real estate market has been flourishing (for the most part) in the past few years.
During 2008 and 2009, the fixed mortgage rates dropped at a slower pace in contrast to the variable ones since times were uncertain and many backed out of variable rates fearing the worst. Well, it turns out that the variable rates would have been a more convenient option. Let us now take a look at how the variable rates compared to the five-year fixed rates in the mortgage market over the last decade.
Variable Mortgage Rates in Canada (2007-2017)
|Year||Variable Rate||5-Year Rate|
We can see that the majority of mortgage borrowers would have fared better with the fixed rates as they were highly unpopular, so they plunged in value dramatically. Even in 2007, when the market was at the peak, variable rates were still lower by more than 1%.
The Significance of Mortgage
Many buyers are primarily focused on how much the property or home they want to buy costs. The mortgage comes second as it usually seems insignificant, but in reality, mortgage can even double the price of your home. Of course, the shorter the term, the lower the rate, but few have the luxury to opt for a 1-year or 3-year term.
The other question is whether to select a closed or open mortgage. An open mortgage is only offered for 1 and 3-year periods, and it implies the possibility to be paid off earlier without any additional costs, whereas closed mortgage binds you to stick to the contract; and if you signed up for 20 years, then, 20 years it is, unless, you want to pay the penalty fee which shall be imposed if the borrower pays off the mortgage earlier.
The charts clearly indicate that a slower economy opens up lower-cost possibilities, but a slower economy reflects onto all of us, and we are more likely not to have the needed cash ourselves when times are tough. Maybe this article will make you think about entering a risk with variable rates which proved to be the more cost-efficient method according to our charts.
Even if many are still haunted by what happened in the USA almost a decade ago when the real estate bubble exploded causing global consequences also known as the global financial crisis of 2008, it does not mean that Canada is on its way to repeat the US pattern leaving 6 millions of USA citizens without their savings and causing an economic downfall domino effect almost worldwide. Even if Home Capital Group Inc. faced some serious issues earlier this year, the Canadian real estate market is still stable.
Regarding Toronto, the situation is similar as in the rest of Canada, including the drop in home sales since May 2017 that caused panic among home buyers and sellers, but a collapse is far-fetched at this point even if many news headlines claimed the opposite.
It is true that Toronto home prices have been growing at a slower rate since May this year and they fell by 16% compared to last year. This led many to believe that the market is going down in addition to the liquidity problems of Home Capital Group that resulted in withdrawal of money and savings as soon as the biggest Canadian mortgage non-banking lender announced that they need a backup of C$2 billion. Nevertheless, real estate remains one of Toronto’s major economic growth drivers, and it is highly unlikely to collapse.
What Exactly Led to Home Capital’s Demise and the Post-Crisis Recovery
After the mini-real estate crisis in May, Toronto is looking at great prospects for the future given that Home Capital is on a good path of recovery as they implemented measures to keep their liquidity intact. What exactly happened with the mortgage lender? After they had sought a C$ 2 billion loan to keep up with their payment obligations and to prevent a chain reaction in the market, many interpreted it as a red flag which resulted in a drop of Home Capital shares and further withdrawal of savings. The thing is that Home Capital reacted on time and responsibly approached the lack of funds, and we simply have to give them credit for that. In the meantime, Home Capital managed to secure the necessary funds to pay their debts and mortgage commitments.
The biggest non-banking mortgage lender was not directly responsible for the mortgage drama, but rather a small number of their broker partners who tried to secure a profit on fraudulent loans. The subsequent OSC investigations hampered Home Trust to finance mortgages which caused a whirlwind in the real estate market.
Nevertheless, though, we have to face the fact that it would take its toll on the real estate buyers and sellers if Home Capital was about to drown, especially because they hold more than 1% of the total mortgages funded in the non-banking sector. Unable to renew their mortgages, many people would be forced to sell their homes, but it would take a lot more to take down the Toronto real estate market.
How Does The Market Reflect on Sellers and Buyers?
The market experienced a slight change after the issues in May as more homes are found on the sales list currently, i.e. listings increased by 73%, while sales dropped by 26%. Still, even if this statistics looks harsh, prices are still steady in Toronto, especially since buyers were able to get a better bargain than they hoped for earlier this year, according to analyses from the First Quarter. The increased number of listings offers more variety to the buyer, but we have to admit that it reduces the profit odds for sellers. The sellers’ best friend, currently, is time, which means that they should not rush into unfavorable deals just because they think they won’t be able to sell. Remember, time is your friend. They should not expect to land dream deals overnight, but they may count on good deals if they set realistic asking prices. The situation may not be as glorious as at the beginning of the year, but the prices are still pretty high and stable.
As for buyers, they should make sure to follow the updates on the listings which gains them an advantage over competitors.
Also, keep in mind that Canada’s banks operate under very strict regulations,which automatically means that a Canadian market crash is highly unlikely.
Despite amended mortgage regulations and possibly higher interest rates, the Toronto real estate market is expected to grow by the year’s end, especially because the market is balanced. It is more about balance than anything else. Rises and drops in prices are perfectly natural, and the supply-demand chain is still within the normal.