Although the Bank of Canada Benchmark Bond Yields increased between 8 and 11 per cent over the last week, the fixed mortgage rates have not yet mimicked this movement and are holding steady at current levels. This is on target with what our Mortgage Rate Outlook Panel has projected; the panel of experts believe that August will be quite a bland month as far as rates are concerned.
Brand Names: Getting the Bang for Your Buck
I’ll admit to forking out some extra cash for name brands when it comes to shoes, food … wine. But I confess I haven’t always given the cost-effective brand a fair chance. Don’t get me wrong, I love a good deal just as much as anyone else but I can also justify paying a little extra for quality. So what about mortgages? Would I ditch my lifelong relationship with my major bank to save some cash? Absolutely!
Smaller lenders are often able to offer lower rates and even better terms when it comes to mortgages, but consumers continue to side with the major bank brands for fear that the smaller lenders could go out of business and they will be left to pay back their entire mortgage. Newsflash: this rarely happens with small lenders.
Often the small lender will sell their book of business to another institution and as part of the packaged deal, the new lender must honour your mortgage terms. This means that you would maintain the payment structure on your mortgage – just paid to a different company. If you are a qualified borrower with provable income you should have no problems finding other funding in the off chance that you are required to pay off your mortgage balance.
How Much Savings Are We Talking About Here?
… I hoped you’d ask! Consider a $300,000 mortgage with a 25 year amortization, below is a run through of three different mortgage options that you have available to you on a 5 year term:
- 2.89 per cent (lowest rate available rate on our Best Mortgage Rates Page)
- 3.04 per cent (average rate amongst top 5 on Compare Mortgage Rates Page)
- 4.22 per cent (average rate among all rates on Compare Mortgage Rates Page)
If you choose to take your business to a smaller lender and have a rate of 2.89 per cent vs. negotiating with your bank and trying to talk them down to even 3.04 (from posted 5.24), you would only save about $23/mo on your mortgage payment. But that adds up over time!
Your balance at maturity is nearly $750 less and you save over $2,100 in interest! Heck, if you can afford to pay that extra $23/mo on your mortgage at 2.89 per cent you will knock 7 whole months off of your amortization and your balance at maturity would be $254,388.35. Every little bit helps. Ensure that the mortgage you choose is right for you and you consider the 3 Ps (pre-payment privileges, portability and penalty) before signing on the dotted line.
Scotiabank Economists’ Special Report on Canadian Housing
Now, for our check in on the Canadian housing market. A report released by Scotiabank this week has been creating headlines, predicting a 10 per cent drop in housing prices within the next 3 years. Adrienne Warren, Senior Economist at Scotiabank, predicts that the total impact from the slowdown may not be fully visible until mid-decade and feels as though the likelihood of a crash or sharp downturn is avoidable. Although current demand is strong in the condo markets, the elevating number of unsold units along with an overall weakening demand will likely lead to a pricing correction; felt the most by the hottest markets – namely Toronto and Vancouver.
The Next 3 Years: According to Scotia’s Crystal Ball
Canadian housing prices continue to rise although at a slower pace which suggests that the cooling effects have begun. The fact that pricing has remained on this path and building permits continue to be issued for condo developments attest to a change in market fundamentals and a shift toward the trendy condo life.
So who is going to feel the effects of this projected 10 per cent correction? Likely the baby-boomer and young professional demographics. Baby-boomers are going to start downsizing and feel the effects of a stagnant market filled with falling property values, as the bulk of their net worth is in real estate. Whereas young professionals could have their home equity slip through their hands and even find themselves underwater.
Take for example a young couple who purchased a $350,000 condo with only 5 per cent down (mortgage value $332,500 plus CMHC fees of $9,143.75 over a 25 year am = effective mortgage amount approx. $341,640). A 10 per cent decrease to the value of this condo would leave it valued at $315,000 in 2-3 years’ time.
Say this couple was smart and went with the 2.89 per cent 5 year fixed. At the end of year 2, the balance on their mortgage will be approx. $322,402 (debt > equity = underwater) but in year 3 they’ll break even and the balance of the mortgage will sit at $312,362 (debt < equity). The end of year 3 looks much better than year 2; however after you take real estate fees, the sunken down payment costs and all mortgage payments to date into consideration, you might be whistling a different tune.
RateSupermarket.ca Week in Review
Neck and neck are the 5 year terms with 48 per cent of visitors seeing what’s available for the 5 year fixed and 5 year variable rates. Barley even on the chart is the 1 year fixed rate (1.5 per cent) and 3 year fixed (1 per cent).