Checking in With the Bond Market
We’ve said it before and we’ll say it again: May has been a turbulent month for bond yields, with the lowest rates seen in over 4 months, and we don’t anticipate June to be any different. Take a peek at the Friday Mortgage Roundup from last week to get the low down on what has been affecting the bond market in Canada and how those changes affect mortgage rates. The chart below captures the movement in the bond yield, which has averaged 1.46. With today’s bond yield sitting well under the 2012 average (thus far) and the recent downward trend, many are speculating that the recent movements will signal a parallel change in mortgage rates.
We’ve seen some great sales this year on mortgage prices: 5 year fixed rates are hitting an all-time low at 2.99 per cent and, for the first time ever, 10 year fixed rates were under 4 per cent! This has left many consumers considering a longer than usual term and taking a second look at the 10 year rates. But what are the professionals saying? How will this affect the average consumer in the case they need to break their mortgage – and will they be able to afford the penalties? Let’s take a look at both sides of the coin:
Why You Wouldn’t Want a 10 Year Fixed Product
If you are considering a 10 year fixed mortgage vs. a 5 year fixed mortgage, there are a few key areas to consider. First of all, the secret is out: the longer the term of the mortgage, the higher the rate. Lenders do this to hedge the risk involved in offering a fixed price without fully knowing the future state of the economy. And what comes with a higher interest rate? Higher payments! So it is important to understand the net result of an extended term: increased regular payments and more of your hard earned cash spent on interest.
What about those already in a 10 year fixed and thinking of refinancing for a lower rate? Well, you had better hope that you are in the second half of your term – or it will cost you. For the first 5 years of your 10 year term you are subject to a penalty that is the greater of 3 months interest or the IRD (interest rate differential). The IRD is based on a number of variables and is the product of your mortgage balance, the difference between your rate and current rates and the term to maturity. Using an example of a $200,000 balance, your rate at 4.50 per cent, current rates of 3.99 per cent and 7 years remaining on your mortgage, your IRD would be:
= $200000 x (4.50-3.99) x 7
Why You Just Might Want a 10 Year Fixed Product
Sure, 5 year rates have been at an all-time low – but so have 10 year fixed! So how do you choose? Well consider this: you know that you are going to have a mortgage for the next 10 years and there is only a 1 per cent difference between the 5 year fixed and 10 year fixed. Maybe you’d like the peace of mind in knowing that your rate is guaranteed for the next 10 years - and can rest easy should any rates sky rocket in 5 years’ time when you are up for renewal. That 1 per cent increase can give you that peace of mind… but it’s not without its commitment issues. What if you need to break your mortgage?
The Cost of Breaking your Mortgage
If you need to break your mortgage within the first 5 years, you are likely going to incur quite the penalty. However, the Canada Interest Act prohibits IRD penalties to be charged on terms lengthier than 5 years after 5 years have elapsed. This means that if your term is greater than 5 years, after you pass the 5 year mark you are only subject to the a 3 month interest penalty.
If you are unquestionably going to be in your mortgage for 5 years, then you can view a 10 year term as a 5 year term with an added insurance – and that’s against rising interest rates. At maturity you have the option to lock in for an additional 5 years and maintain your rate- but you are only charged 3 months interest should you decide to bust loose.
The Dreaded IRD: Is It Going Extinct?!
Interestingly enough, it just might! Here’s why… consider today’s rates. You can get a 10 year fixed mortgage in and around the 3.99 per cent mark. Let’s say in 4 years you have to break your mortgage because you won the lottery (a girl can dream, can’t she?). Rates at that time have increased and now a 10 year fixed mortgage is priced at 5.84 per cent. What is your penalty? The greater of the IRD or 3 months interest:
IRD = Mortgage Balance x Different Between Your Rate and Current Rates x Term to Maturity
IRD = 200,000 x (3.99-5.84) x 6
IRD = -$22,200
The IRD is a factor of the difference between your rate and current rates, so if rates have increased since you negotiated your mortgage (which is bound to happen considering the rock bottom rates we have seen) your penalty will default to 3 months interest. Pretty neat!
RateSupermarket.ca Week in Review
We’ve seen quite a bit of movement this week, both in fixed and variable rates! Kicking off the downward trend is 3 year fixed, down to 2.69 per cent. 5 year fixed is up to 3.08 per cent, followed by 7 year fixed, also down at 3.79 per cent.
3 and 5 year variable rates also saw a drop, at 2.60 per cent and 2.65 per cent respectively. All other rates stayed put on the Best Mortgage Rates page.
Want the inside edge when best mortgage rates change? Be the first to know and sign up for RateAlert, RateSupermarket.ca will e-mail you a daily digest of the mortgage rates that have changed in your area!
5 year fixed proves once again to be the most popular search, with 46 per cent of visitors checking out the rates. 5 year variable came in second with 27 per cent of searches, followed by 3 year fixed at 7.4 per cent and 10 Year Fixed at 7.2 per cent.