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Which Bank Has The Lowest Mortgage Rates – Monthly payments and interest are for a 25-year amortization. Prices are for Prime customers. To qualify, you generally need a good credit score and a steady job.
The 5-year variable mortgage is the most popular variable rate mortgage in Canada. It’s called a variable rate mortgage because the interest rate is based on a lender’s prime rate and can go up or down over the 5-year term of the mortgage. While the 5-year variable rate and the 5-year fixed rate are typically similar, homeowners with variable rate mortgages in 2020 have seen their mortgage rates drop dramatically due to the Bank of Canada’s rate cut due to the COVID- 19.
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A variable rate mortgage is a mortgage where the interest rate is based on the prime rate. This means that the interest rate can go up or down throughout the life of the mortgage, depending on how the prime rate changes. A common misconception with variable rate mortgages is that your monthly mortgage payments will vary with the interest rate, which is not true. Although in very rare cases, such as with the Scotiabank Flex Home Loan, your payments will change based on interest rates.
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While your payments stay the same, the amount of interest you pay changes. Each mortgage payment contributes to the principal and interest on the mortgage. A higher mortgage rate means a higher percentage of each payment is spent on interest. With less of each payment contributing to principal, you’ll pay off your mortgage balance more slowly. As a result, you will need to increase your mortgage payments to compensate for paying off a smaller mortgage balance next term.
The opposite is true if the variable rate decreases throughout your term. A declining variable rate means you’ll pay less in interest and that more of each payment contributes to your mortgage principal. You’ll pay off your mortgage faster with each payment. Your mortgage payments will likely be lower next term because you’ll be ahead of schedule on your mortgage payments.
Overall, it’s important to understand that changing variable rates will not affect your monthly mortgage payments. Instead, interest rates will determine the percentage of each mortgage payment that contributes to principal and interest. A rising variable rate means less of your payment goes to the principal and you’ll pay off the mortgage more slowly. As a result, you will need to increase your mortgage payments next term because you will be behind your mortgage payment schedule.
Just like the 5 year fixed rate mortgage is the most popular mortgage in Canada, the 5 year variable rate is one of the most popular mortgages in Canada. The main reason for this is the potential for large savings that variable rates provide. Variable mortgage rates are often much lower than fixed rates, making them a tempting option for homeowners looking for the absolute lowest mortgage rate. The ability to save money when interest rates fall makes variable rate mortgages powerful, however, it can be a double-edged sword that costs borrowers more money if interest rates rise instead.
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In light of a downward trend in interest rates in Canada in recent history, variable rates have outperformed fixed rates in terms of mortgage interest savings and allow homeowners to speculate on future rates. If market rates fall or remain stable during your term, then variable rates appear.
There is also limited availability of variable mortgage terms. Many variable rate lenders offer 5 year terms, but only a few offer variable rate terms that are less than 5 years. For example, RBC and TD only offer variable rate mortgages with 5-year terms. Other lenders, such as Scotiabank, CIBC and BMO, only offer variable rate mortgages with terms of 5 or 3 years.
For many homeowners, a 5-year term may be a more attractive option compared to a 3-year term. Having a longer term means they won’t have to go through the remortgage process as often. There are also many lenders that offer 5 year variable rate mortgages, which is why 5 year variable rates are so low compared to 3 year variable rates. In some cases, 5-year floating rates can be half of 3-year floating rates.
While 5-year terms may have a lower variable rate, a five-year term may not always be the best option for some homeowners. For closed-end variable mortgages, breaking down your mortgage, such as by refinancing or selling your home, may force you to pay significant mortgage penalties. If you think you will need to break your mortgage soon, then a 3-year variable rate mortgage may be a better option than a 5-year mortgage.
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Having a variable mortgage with a longer term also means you will be subject to variable interest rates for a longer period of time. For those who cannot handle a higher level of risk, a longer term may not be a great option.
It is important to understand that an adjustable rate mortgage is constantly changing. This means that the rate you get at the start of your term may not be the same as the rate at the end of your term.
While an variable rate mortgage is constantly changing, you have the option to “lock in” the rate at any time during the term of your mortgage. This means you’ll be guaranteed the same rate for the rest of your term, even if the prime rate changes.
Note that you will likely need to pay a fee to lock in your rate. This fee is usually a percentage of the mortgage amount and can be anywhere from 0.5% to 2%.
Bank Of Canada Raise Interest Rates Again
Locking in your mortgage rate can provide some security, especially if you think interest rates will rise. However, if rates drop during your term, you may have missed out on a lower rate.
You may have heard of an open versus closed mortgage before. The difference is your ability to prepay your mortgage without penalties. An open mortgage allows you to prepay an unlimited amount of mortgage principal each year. However, you will get a higher mortgage rate than a closed mortgage in exchange for this benefit.
A closed mortgage still allows you to make annual mortgage payments, but they are limited to a certain percentage of the principal. Most Canadian mortgage lenders allow you to prepay 10% to 20% of your mortgage principal each year without penalty. If you decide to prepay more than you’re allowed, you have to pay mortgage prepayment penalties.
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Overall, an open mortgage is better if you expect to make significant mortgage payments during your tenure. Otherwise, it’s best to stick with a closed-end mortgage and get a lower interest rate.
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Since peaking in 1981, with a mortgage rate of 19.81%, the 5-year variable mortgage rate has declined over the past four decades. The record high interest rates were due to the two oil crises of the 1970s.
In 1973 and 1979, Canada experienced a rapid increase in oil prices. In response to this inflation, the Bank of Canada raised the Prime Rate, which raised variable mortgage rates.
Then another major change to the 5-year floating rate was in 2009 when the Bank of Canada cut the Prime Rate to stimulate the economy. This led to a reduction in the five-year variable mortgage rate to 1.95%.
Following the economic recovery from the Great Recession of 2008, the Bank of Canada began raising the key interest rate. However, in 2020, Covid-19 devastated the global economy. The bank had no choice but to stimulate economic growth by cutting interest rates. As of 2022, the 5-year floating rate is around 2.15%. However, economists expect it to increase in the coming years.
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Your variable mortgage rate is directly affected by the Bank of Canada rate. As a result, it is important to understand why the Bank of Canada changes interest rates. Generally, the Bank of Canada interest rate is a tool used to balance economic growth with inflation.
Lower interest rates allow home buyers, consumers and businesses to borrow more money to spend and invest cheaply. As a result, lower interest rates stimulate the economy because:
However, after prolonged periods of low interest rates, everything becomes more expensive. This is known as inflation, which increases the daily cost of living. For example;
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To reduce inflation, the Bank of Canada must raise interest rates to make the cost of borrowing more expensive. This increased interest rate will apply to your mortgage immediately and you will pay more interest over the life of your variable rate mortgage. Given the high cost of living increases in Canada, it is expected that the Bank of Canada will raise interest rates. In summary, interest rates change to affect economic growth and reduce inflation.
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Source: Statistics Canada. Table 10-10-0006-01 Funds Advances, Outstanding Balances and Interest Rates on New and Existing Borrowings, Bank of Canada
A capped variable rate is a maximum limit that your variable mortgage rate can reach during your term. This limit protects you from significant rate hikes, but your basic variable rate may be higher to account for this feature.
You may want to take advantage of any reduction in interest rates, but you want to limit how high your mortgage rate can go. For example, a mortgage lender may
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