Money: With fixed rates below variable ones, mortgage market is in the Upside Down - PressFrom - Canada
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MoneyWith fixed rates below variable ones, mortgage market is in the Upside Down

12:40  26 july  2019
12:40  26 july  2019 Source:   globalnews.ca

Alternative lenders gain market share as total mortgage growth slows, CMHC says

Alternative lenders gain market share as total mortgage growth slows, CMHC says Alternative lenders gain market share as total mortgage growth slows, CMHC says

Stuck in the Upside Down ? On the other hand, the main influence on variable rate mortgages is the BoC’s key interest rate , which affects short-term rates and hasn’t moved since October 2018. If you currently have a variable - rate mortgage you might be able to lock into a lower fixed rate .

globalnews.ca. With fixed rates below variable ones , mortgages market is in the Upside Down . Normally, the peace of mind of having a fixed mortgage rate comes with a price premium. Now, they come with a discount. Here's what's happening.

With fixed rates below variable ones, mortgage market is in the Upside Down© marchmeena29\Getty Property investment and house mortgage financial concept, Hand putting money coin stack with wooden house

Call it the Stranger Things of the housing market: Canadians can now get a lower interest rate on a new mortgage by locking into a fixed rate, rather than opting for a variable rate.

That's not how things usually work.

"People are used to paying extra for the 'insurance' of a five-year fixed rate," Robert McLister, a Toronto mortgage broker and founder of RateSpy, said via email.

But that price premium is now gone. For example, the lowest nationally-available five-year fixed rate for a conventional mortgage is 2.69 per cent, according to rates-comparisons site RateSpy.com. By comparison, the lowest equivalent variable rate is 2.84 per cent.

Bank of Canada cuts mortgage stress test rate for first time since 2016

Bank of Canada cuts mortgage stress test rate for first time since 2016 For the first time in almost three years, the Bank of Canada has cut its minimum mortgage qualifying rate, dropping it to 5.19 per cent from 5.34 per cent. 

Fixed rate and adjustable rate mortgages have similarities and differences, depending on your The new rate will be based on market rates , not the initial below - market rate . If you're very lucky, it may be A variable rate mortgage is defined as a type of home loan in which the interest rate is not fixed .

With fixed rates below variable ones , mortgages market is in the Upside Down . Normally, the peace of mind of having a fixed mortgage rate comes with a price premium.

When it comes to financing available to well-qualified borrowers, five-year fixed rates haven't been this cheap compared to variable rates in decades. The last time the mortgage market pulled off something similar was right before the 1990s recession, according to historical data compiled by McLister.

"We’re in rare territory," he wrote in a recent blog post.

Here's what to make of it.

Investors are worried about a slowing economy and possibly a recession

What's happening in the mortgage market has a lot to do with the bond market, where investors are currently getting a better return on short-term than on longer-term debt.

A bond is a type of investment that represents a loan made by an investor to a company or government entity for a set period of time. Normally, lending money over longer time horizon yields higher returns, a reward for creditors willing to take on the higher risk of being separated from their money for longer. But returns on longer-term bonds can fall below those on short-term debt when investors believe the economy is going to slow down — or even dip into recession — and interest rates are headed south as well. The result is what economists call an inverted yield curve.

Central bank qualifying rate used in mortgage stress tests falls

Central bank qualifying rate used in mortgage stress tests falls OTTAWA — The Bank of Canada's rate used by mortgage stress tests to determine whether would-be homeowners can qualify has dropped for the first time in three years. The central bank's five-year benchmark qualifying rate is now 5.19 per cent, down from 5.34 per cent. It's the first decrease in the five-year fixed mortgage rate since September 2016, when it dropped from 4.74 per cent to 4.64 per cent, and increased steadily since. The qualifying

The gap between variable rate mortgage and fixed rate mortgage products has narrowed in In the past, variable rates used to be calculated prime rate minus, while today they’re prime rate plus Convertible fixed rate mortgage : Let’s you convert to a closed term of one year or longer at any time

Fixed Rate – Fixed , as in set, locked in. A fixed rate mortgage is one where the interest rate will stay the same for a certain amount of time. Variable Rate – Variable , as the name suggests, changes. When you hear on the news that interest rates have gone up or down , you’ll know your mortgage

That was, until recently, the situation in the U.S., where traders are worried the economy is going to hit the brakes. The yield curve there has now steepened significantly as the U.S. central bank, the Federal Reserve, is widely expected to cut interest rates on July 31, which the market hopes will keep the economy running.

In Canada, though, the yield curve is still inverted. That's not necessarily a sign of bad things to come. Rather, it likely reflects a combination of domestic and external influences.

On the one hand, lower returns on long-term debt in the U.S. and other markets put downward pressure on Canadian longer-term bonds.

"Year-to-date, Canada has imported roughly 70 per cent of moves in global markets," said Ian Pollick, head of North American Rates Strategy at CIBC Global Markets.

READ MORE: What does another Fed rate hike mean for bond holders?

On the other hand, our own central bank, the Bank of Canada (BoC), has given no hint so far of wanting to cut rates, as our economy has been chugging along just fine, Pollick said.

Canada’s Mortgage Borrowers Are Moving To The Back Alleys Of The Market

Canada’s Mortgage Borrowers Are Moving To The Back Alleys Of The Market Canada’s Mortgage Borrowers Are Moving To The Back Alleys Of The Market

An upside - down mortgage is simply a mortgage in which the owner owes more than the house is worth. If you can afford the monthly mortgage Sometimes this instability benefits home buyers. When the housing market is strong, buyers can get a home at a relatively low price and sell it a few years

With fixed rates below variable ones , mortgages market is in the Upside Down . Normally, the peace of mind of having a fixed mortgage rate comes with a price premium. Now, they come with a discount.

And while an inverted yield curve has often predicted a period of cooler growth, it's a much less reliable predictor of actual recessions in Canada than it is in the U.S., said Doug Porter, chief economist at BMO Financial Group.

READ MORE: Bank of Canada keeps key interest rate steady at 1.75%

For his part, BoC governor Stephen Poloz recently said he believes Canada's current yield-curve inversion is an "innocent inversion" that is "more statistical than indicative of a recession."

What does this have to do with the mortgage market?

The yield on the five-year Government of Canada bond is a key benchmark for a five-year fixed-rate mortgage. And as the return on the five-year government bonds moved lower, so did the interest rate on five-year fixed-rate mortgages.

On the other hand, the main influence on variable rate mortgages is the BoC's key interest rate, which affects short-term rates and hasn't moved since October 2018.

This won't last forever, though. Pollick expects the BoC to have to cut interest rates next spring, as lower rates in the U.S. put upward pressure on the loonie, which will be a drag on Canada's economic growth.

Tips to pay off your mortgage early

Tips to pay off your mortgage early Many homeowners dream of being mortgage free and look forward to the day when they make their final repayment on a home loan. But short of a big lottery win or an unexpected inheritance, the chances of paying off a mortgage overnight are slim for most people. However, it is possible to reduce the time it takes to pay off a mortgage by following a few tips from the experts. First, check your mortgage contract or contact your mortgage lender to determine the terms and conditions for increased payments, including what additional amounts are allowed and when, and what penalties may arise for early repayment. Next, consider your options.

Find out the benefits of fixed - and variable - rate mortgages , and learn which option is best for you. In the United States, the interest rate for most ARMs is based on the U.S. Treasury rate , but Now that you know how ARMs compare to fixed rate loans, how do you decide which one makes the most sense for your situation? Since interest rates have almost nowhere to go but up in today’s market

In a fixed rate mortgage , the interest rate , remains fixed for the life (or term) of the loan. In case of an annuity repayment scheme, the periodic payment remains the same amount throughout the loan. A resurgence in the equity release market has been the introduction of interest-only lifetime mortgages .

Bond markets tend to adjust to a first expected interest rate cut roughly six months before it actually happens, so if the BoC were to cut rate rates in March or April, you'd see the yield curve starting to steepen around October, Pollick said.

Porter, however, does not see Canada's central bank moving rates any time soon. BMO's forecast is for steady rates throughout 2020.

The implication for the mortgage market is that "we could be in this very unusual situation for a while," he said.

What are the implications for Canadian mortgage holders?

If you're in the market for a new mortgage, a five-year fixed-rate mortgage at 2.69 per cent or less "is hard to say no to," McLister said.

If you can stomach some risk, you might want to gun for an even lower rate, such as the 2.49 per cent fixed rate that's currently available on mortgages with a two-year term.

If you currently have a variable-rate mortgage you might be able to lock into a lower fixed rate. In a recent blog post, McLister said he spoke with a couple with a 3.4 per cent variable rate whose bank is offering a 2.92 per cent fixed rate. That would translate to almost $4,200 in savings on a $400,000 mortgage, according to McLister.

READ MORE: 3 tips that could save you thousands on your mortgage

If you decide to switch to a fixed rate, you should still try to negotiate with their bank, McLister said. One way to do that is by printing off a list of the best mortgage rates you'd be eligible off with other lenders. You should also keep in mind that your bank might want you to sign up for a term that's longer than the remaining term on your current mortgage. Finally, you should be aware that breaking your mortgage usually comes with steeper penalties when you have a fixed-rate mortgage, which could make locking-in less attractive if there's a change you'll have to move or refinance before the end of your new fixed term.

As for signing up for a new variable-rate mortgage, McLister is wary of picking that option in hopes your borrowing costs will go down if a BoC cuts next year. Even if the central bank does lower its benchmark rate next year, there is no guarantee lenders will pass through 100 per cent of those savings to borrowers, according to McLister.

"Banks can get stingy to protect their profits in low- or falling-rate environments," he said.

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