A new standard for 5 year fixed mortgage rates was reached this week, dropping lower than ever before to 2.78 per cent – a move that surprised mortgage experts and home buyers alike. Offered by Advent Mortgage Services this bottom-barrel rate was available only in Ontario, Yukon and Northwest Territories – at least for now. Whether other lenders will get into the game with a rate drop of their own is anyone’s guess – these undercutting bidding wars can disappear faster than a Cyber Monday flash sale.
UPDATE: As of November 30, five year fixed dropped even lower to 2.77 per cent! This rate is offered by Butler. Check out the details here.
A Great Time to Lock In
Six months ago, who would’ve thought 2.99 per cent would become the mainstream norm? As lenders continue to one-up each other in the fixed rate market for a shrinking buyer supply, it’s become reality. At present time, the best rate for five-year variable is 2.55 per cent – a gap of only 22 basis points. With economists leaning toward a potential rate hike in the third quarter of next year, that gap could soon be even smaller, seeing variable possibly increasing by 50 bps or so. It’s just more proof that if you’re on the market for a new home now, it’s a great time to snap up a fixed rate.
A Limited Buyer Pool
While these fantastic lock-in opportunities are sure to turn heads, they can often be saddled with several buyer restrictions. Here’s a breakdown of what these restrictions mean, and what home buyers will require to qualify:
Sorry for those looking to refinance or renew – this means a rate is for new buyers only. For those looking to break into the market, though, this presents an ideal chance to score a great record-breaking rate, and at softening market prices.
If you’re purchasing with the intention of running a rental property, you’re also out of luck. This limits a rate to only buyers planning on residing in the home – all rental properties and land lord buyers are exempt.
High Ratio Mortgages Only
Another break for that first time buyer segment! This means a rate is available ONLY to those who pay less than 20 per cent on their home’s down payment. Keep in mind that this will also subject your monthly mortgage payments to CMHC insurance premiums, which are required for all non-conventional mortgages (though seeing as over half of Canadian home buyers require mortgage insurance, this doesn’t shut too many buyers out of the category).
A High Beacon Credit Score
This indicates you’ll need a slightly higher-than-average credit to score a rate. Your credit score is used by lenders when determining your level of borrowing risk. While 700 is toward the higher end of the scale (900 signals a perfect score), the average cutoff accepted by lenders is around the 650 mark.
A Minimum Mortgage Amount
This is a somewhat out-of-the-box requirement, meaning buyers can’t access this rate for lower-end property values, and is likely due to internal lender factors and their ability to provide such a low rate. However, according to the CMHC, the MLS average 2012 point forecast for Ontario is $386,000 – given current market conditions, it’s likely many buyers will fit into this category.
The 20/20 Treatment
Always be sure – is this low rate coupled with other full service mortgage features? For example, many provide lump sum and prepayment opportunities up to 20 per cent of the mortgage value annually. Let’s break down the money you could be saving in interest when combining these prepayment options with an already low rate.
- Purchase price: $386, 000 (CMHC MLS 2012 average point forecast for Ontario)
- Mortgage rate: 2.78 per cent (renewed consistently for the length of the amortization).
- Amortization: 25 years
- Down payment of five per cent: $19,300
- CMHC premium: $10,084
- Total mortgage value: $376,784
Run through our trusty Mortgage Calculator, we can determine that our monthly mortgage payments will be $1741.
Let’s say we’re looking to save even more, and decide to flex the lump sum options available to us. Setting aside an additional $1,000 a year will actually save $10,364 in interest – and shave a year off the amortization.