The COVID-19 crisis has impacted every level of our financial system, from government spending to business operation, all the way down to the price of hand sanitizer. But one of the biggest impacts has come from changes to interest rates, both across Canada and the rest of the world.
Naturally, with mortgage rates as low as they are, many Canadians are wondering if now is a good time to apply for a mortgage. Of course the process of buying a home or getting a mortgage in the current environment will be far from ‘normal’. But is that a good thing, or bad?
How low are interest rates right now?
When we look at the historic mortgage rate data over the last 10 years (2010 – 2020) we see that the mortgage rates currently available are very close to their historic lows:
- The lowest 5-year variable rate available in the last 10 years was 1.69%, in 2017. Today, the best 5-year variable rate is 1.95% (as of May 19 2020).
- The lowest 5-year fixed rate available in the last 10 years was 2.09%, in 2016. Today, the best 5-year fixed rate is 2.14% (as of May 19 2020).
At first glance, that’s one point for the ‘getting a mortgage now’ camp. Securing a low interest rate, particularly on a fixed-rate mortgage, effectively locks that rate in for the initial term of your mortgage, which is between 1 and 10 years.
Of course, there’s more to consider. Let’s start with what mortgage rates will likely do next.
Mortgage rate outlook
The Bank of Canada’s target for the overnight rate is currently at a historic low of 0.25%. That’s effectively the lower limit, and the Bank has said as much. This has meant that prime rates are about as low as they’ll ever be. For borrowers wanting to get a variable rate, this is more or less as low as they come.
Because variable rates are so low, now is one of the rare times that fixed rates are actually higher than variable rates. That’s because, with nowhere to go but up, fixed rates are riskier for the banks. Regardless, fixed rates are about as low as they’re likely to get as well.
And yes, while rates will probably only go up from here, it’s not necessarily going to happen quickly. Mortgage rates will likely stay where they are until there are clear signs of some economic recovery.
The current housing market
Of course, whether now is the right time to buy a home also hinges on the price of housing. The tricky thing is that the current market is… complicated. On one hand, we’ve seen a sharp reduction in the number of houses being sold. We would normally be in the thick of the Spring homebuying season right now, but we’re instead seeing just a trickle of finalized purchases. Toronto and Calgary, for example, are experiencing around a third of the number of sales compared to this time last year.
Normally, a low number of sales would result in lower prices, as sellers attempt to remain competitive. However, we’re also seeing a big drop in the number of houses up for sale, with many homeowners skittish about selling during the pandemic. Sales look to have dropped slightly more than the number of listings, which may push prices down.
What does this mean for buyers? Well, with fewer people looking at what homes are on the market, sellers are more willing to negotiate, to a point. However, there’s far less diversity in the market, which will limit your choices. You can also expect your purchase to be a little less chaotic than in recent years, with fewer homes being sold in a flurry of bidding wars. With prices slightly lower in most cities, it could be a good time to consider a purchase. It’s unclear how quickly, or whether, prices will rise again.
Advice for first-time home buyers
If you’ve already been looking to get into the market as a first-time homebuyer, now might be one of the best opportunities to get a mortgage for your first home. Regardless of movement in the housing market, one of the best things you can do right now is to get a mortgage pre-approval.
A mortgage pre-approval is an in-principle offer from a lender for a particular mortgage and a certain rate, which is good for up to four months. Though pre-approvals can guarantee a mortgage rate for you, keep in mind that they do not guarantee final mortgage approval. This will ultimately hinge on your down payment and income source at the time of your mortgage application.
What’s most important to remember is that you shouldn’t rush into home ownership if you’re not ready. When buying property for the first time, it should be a decision you make based on your life stage and financial circumstances, not the market. You need to be able to afford the mortgage payments, have the minimum down payment ready, and have a secure source of income.
You’ll also need to consider whether you’re able to qualify for a mortgage right now. If your employment and income is stable, it shouldn’t be a problem. However, if your income has taken a hit due to the COVID-19 crisis, you may have trouble getting a mortgage in the first place, let alone getting a good mortgage rate.
For Canadians with existing mortgages
Renewing your mortgage while rates are low lets you benefit in the same way that a new homebuyer would, locking in a great rate for the duration of your next mortgage term. If you’re within four months of your renewal date, you should compare mortgage rates today to make sure you’re getting the best ones on offer. You can get a rate hold if you find a great rate before your renewal date.
Also, don’t worry too much about switching lenders upon renewal. It’s true that a straight renewal with your current lender won’t require you to requalify, while switching lenders will. However, as long as your income and employment are secure, you should be able to qualify with a new lender without too much trouble.
Refinancing in such a low rate environment is also possible, although not without risks. Typically, the savings you would get from refinancing to get a lower interest rate would be about the same as the penalty you would be charged to break your mortgage. However, the current rate environment could put you on top, depending on the details of your mortgage. In short, If you think rates will increase before your mortgage is up for renewal, you should consider refinancing, in order to secure today’s low rates.
Of course, there are other reasons to refinance, including consolidating your debts or taking equity out of your home. If these are important to you, then it might make sense for you to refinance now, while rates are low.
The bottom line
While current circumstances present some good opportunities for homeowners, whether now is a good time to get a mortgage really depends on your own financial situation. Whether you’re looking to buy your first home or renew or refinance your mortgage, your decision has to depend on your current financial situation and needs over the coming years. If you’re not ready for a mortgage, you shouldn’t rush.
If you’re having trouble deciding if you’re ready to take the leap into a new mortgage, you might consider speaking to an independent mortgage broker (consultations are free). As well as giving you expert and independent advice, they can help you find and negotiate a great mortgage rate in the case you do decide to take the plunge.