The Bank of Canada has dropped their target interest rate to levels not seen since the 2009 Great Recession, and interest rates for a variety of financial products have followed suit. This makes it a remarkably perfect time for Canadians to benefit from these record-low interest rates.
Mortgage rates for high-ratio mortgages have reached rates as low as 1.29% for five-year fixed terms. This makes it a great opportunity to lock-in low rates if you are currently looking to purchase a new home. Interest rates are forecasted to stay low until 2023, so there is plenty of time to enter the housing market. Housing prices have also been quite volatile during 2020. While there has been an uptick in sales over late summer and fall has demand caught up, a second wave of lockdowns may impact sales over the winter.
For homeowners with an existing mortgage, you can take advantage of current low rates by refinancing your mortgage. Refinancing allows you to transfer your existing mortgage into a new one at current rates, however, it does mean that you may need to pay mortgage break penalties. Using a mortgage refinance calculator can help you see whether it is worth it to refinance your mortgage, what costs you can expect, and potential future savings. When refinancing your mortgage, you can also extend the amortization period to reduce your monthly payments, which can be helpful if you are having short-term financial difficulties, however, this does mean that you will be paying more interest over time. You can also access your home equity when refinancing.
Mortgage penalties when refinancing depends on your current mortgage product. If you have an open mortgage, then there will be no penalties. If your closed mortgage has a fixed rate, then penalties can be significant as penalties are calculated using an “interest rate differential”. This means that the penalty would be the difference between the interest payable at your current rate and interest under the current posted rate from your mortgage lender. Refinancing can also come with additional costs, such as appraisal, discharge, and registration fees. Paperwork is also high compared to if you were renewing your mortgage.
However, at today’s low mortgage rates, it is often advantageous to refinance into a lower rate. Interest savings can outweigh mortgage penalties and refinancing costs. Using a refinance calculator and also comparing lenders to find the best mortgage rates in Canada can lead to thousands of dollars in savings. If you are currently shopping around for a new mortgage, look to see whether an open or closed mortgage is right for you. If you plan on paying off your mortgage in full soon, an open mortgage will allow you to do so with no charges.
If you expect interest rates to drop even further, a variable rate mortgage might also be a good idea. If you want to skip any uncertainty and want to lock-in today’s rates instead, a fixed-rate mortgage would be better for you. Your mortgage term length is also another point to consider. Should you sign onto a fixed-rate mortgage for two years, and then lock-in to a longer-term mortgage once rates start to rise?
Home equity line of credit (HELOC) is another financial product that benefits from falling interest rates. HELOCs allow you to borrow from it just like a credit card, but being secured against your home’s equity means that it has a much lower interest rate. Usually, a HELOC’s interest rate is based around the current prime rate. The prime rate fluctuates, but not surprisingly, the prime rate is currently at its lowest level since 2010.
A home equity line of credit is a great way to consolidate debt with higher interest rates, such as credit card debt, into a much lower rate. With current HELOC rates as low as 2.65%, it can be a good way to pay off debt with higher rates today. Personal lines of credit and other loan products can also have variable interest rates that move as the prime rate changes.
Take advantage of current low-interest rates by consolidating debt and refinancing your mortgage into a lower rate. While rates are expected to stay low for a few more years, getting the ball rolling today can help you save thousands over the next few years. Savings can quickly add up, so be sure to compare your options ahead of time.