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.