On October 30, 2019, the Bank of Canada made a new interest rate announcement. Economists expected the Bank to keep the benchmark rate of 1.75% unchanged . this happened so the mortgage rates should remain mostly unchanged as we go into the typically slower winter season in Toronto. However, analysts will be looking for clues as to what the Bank will do next year. With the election settled, the economy doing reasonably well, and the housing market getting stronger, it would be safe to assume that the Bank will look to raise rates next year.
Whether you are looking to sell or buy a home, interest rates matter significantly. They affect how easy it is to obtain a mortgage, what you’ll pay throughout the loan, and even home prices themselves.
Today’s Rates In Context
A lot of people who would like to buy a home hear the words “rising interest rates” and are spooked. Buyers know that means they will have to pay more interest throughout the loan. However, it’s critical to keep today’s rates in context. In 2007, just 12 years ago, the benchmark rate was 4.75% . When the recession hit, the central bank was forced to drop the benchmark rate significantly. It went down to 0.5%, a drop of 4.25% in a little over a year.
As the economy stabilized, interest rates never rose to match their “former glory.” The current benchmark rate is 1.75%, a full 3% lower than just before the 2008 global recession. In other words, interest rates are still lower today than most of the pre-2008 era. They are certainly not as low as 0.5%, but they are not high compared with other times. It’s still a great time to get a mortgage and become a homeowner.
Your Mortgage Will Not Be 1.75%
While the benchmark rate guides mortgages, they are not bound by it. The interest you will have to pay on a mortgage varies based on various factors. Your credit score, debt ratios, money down, and other metrics will be used to determine the risk to the bank. The higher the risk, the higher the interest rate.
Even if you have the best credit score and have lots of money down, the bank or credit union still won’t give you a mortgage for 1.75%. They almost always add a percent or two. For example, a conventional 20% down mortgage has a five year fixed rate of 2.69% our rates are posted here at Citadel Mortgages. Of course, if your credit score isn’t perfect or if you have other issues, you may find that you will have to pay a little bit extra. Remember, this is still a fantastic rate compared to 15 years ago!
You Will Be Qualified At A Higher Rate
There have been some changes to the mortgage rules in Canada. As of January 1, 2018, buyers have to qualify for a mortgage based on the posted 5-year benchmark lending rate or the customer’s mortgage rate + 2%, whichever is higher. The idea behind this rule change is that lenders need to ensure that mortgagees can handle rate increases.
As of the time of this writing, the benchmark 5-year lending rate is 5.19%. Therefore, if you qualify for the lowest rate of 2.69%, a lender will have to approve you as if the mortgage interest rate was 5.19%. Practically speaking, this means that all the calculations are done assuming a 5.19% rate instead of the low 2.69% rate. On an $800,000 loan over 25 years, this means the bank will have to calculate your debt-to-income ratios based on a monthly payment of $4,766 instead of $3,666. As you can see, this difference has a massive effect on the ability to get a loan!
You can learn more about these changes be visiting our site as we break down the changes. https://citadelmortgages.ca/first-time-home-buyer/
Interest Rates Have An Effect On Property Prices
Interest rate increases tend to cool off the market. Fewer people will be able to obtain mortgages because the monthly payments will be too high. Also, the cost of home equity lines of credit rises, which results in less money to invest in new homes and less to spend on renovations.
Conversely, interest rate decreases can jumpstart a falling market. A lower interest rate makes it easier for buyers to qualify for a loan and makes homeownership more affordable in general.
Right now, since interest rates are quite low when compared with times 10, 20, or even 30 years back, prices have had room to rise. Since the Bank of Canada is expected to keep interest rates on hold, this means that properties should continue to have space to appreciate.
Get The Best Interest Rate
The interest rate that the Bank of Canada sets periodically has a dramatic effect on the economy. A higher interest rate is associated with a better economy and often can “cool” the housing market. A lower interest rate is associated with a worse economy, but since the interest rate is less, more buyers can qualify for a mortgage. Regardless, for the foreseeable future, interest rates will be near historic lows. While the Bank of Canada may elect to raise it a quarter of a percent or so, it’s still quite low – even compared to pre-2008 levels.
No matter what the broader market is doing, you want to get the best interest rate for your mortgage. There’s no point in paying more money to the bank than is necessary!
At Citadel Mortgages, we can submit your application to multiple lenders. These include both banks and credit unions. We can make these submissions with one hard credit pull (which keeps your credit score higher). Each financial institution will have a different rate, but since you have applied to so many, you’ll be able to pick the lowest one! That way, you’re virtually guaranteed to pay the lowest interest that you can. Of course, this puts more money in your pocket every month!
No matter what your credit score is, Citadel Mortgages can help you get approved. Contact us today, and we’ll help you get the mortgage you need at a rate you deserve.
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