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Mortgage rates are going down for some Canadians.
Royal Bank of Canada (RY.TO) lowered its advertised five-year fixed rate from 3.89 per cent to 3.74 per cent. It comes as a result of market forces bringing down the 5-year government of Canada bond yield, which is what banks base their fixed mortgages on.
Preferred clients at Canadian banks have already been negotiating for lower rates.
Many of the alternative lenders like smaller banks and non-bank mortgage providers cut their fixed rates in December as bond yields fell on fears of a slowing global economy.
“These smaller lenders put pressure on the big banks to drop their rates as well,” James Laird, Co-founder of Ratehub, told Yahoo Finance Canada.
So how much does today’s discount save homeowners? Ratehub crunched the numbers for a $800,000 dollar mortgage.
A 5-year fixed rate of 3.89 per cent will have monthly mortgage payments of $4,161.
A 5-year fixed rate of 3.74 per cent would have monthly mortgage payments of $4,096.
So the 0.15 per cent difference would lower mortgage payments by $65 per month or $780 per year.
RBC is the first of Canada’s six biggest banks to publicly make the move, but the rest are expected to follow suit. RBC says besides falling bond yields, a number of other factors went into the decision.
Homebuyers could be in for even steeper discounts to their mortgage rate in the coming months.
“Canadians who need a mortgage this year should check back frequently with rate sites and mortgage providers,” says Laird.
“As the spring homebuying market approaches many lenders will offer deep discounts and promotions in order to attract new customers.”
Variable vs. fixed mortgages
Variable mortgages have been trending higher across the board. That type of mortgage moves with the Bank of Canada’s overnight rate.
A string of hikes by the Bank of Canada has narrowed the gap significantly between variable and fixed mortgages since November.
At 3.55 per cent, RBC’s variable rate is now 0.19 per cent lower than their fixed rate.
“A spread this small usually is not enough for clients to take on the increased risks of a variable rate.,” says Laird.
Circle Mortgage Group President Jivan Sanghera says banks want to nudge homeowners into fixed mortgages to protect their own bottom lines.
“Banks are compressing the spread between fixed and variable rates to influence clients to forgo the risk of rates rising and lock-in, what they are really doing is insulating themselves from a drop in prime which would lead to lower rates, and a lower or even a negative yield for the bank,” Sanghera told Yahoo Finance Canada.
Sanghera says the variable rate mortgage is the way to go.
“The best rate available today is prime minus 1.2 which is 2.75 per cent versus the best rate available on a 5 year fixed which is 3.49 per cent, both being CMHC insured mortgages.”
“Even with 2 more prime rate increases that rate only gets to 3.25 per cent on the variable. The average change in payment is $13 per $100,000 with a rate increase or decrease,” says Sanghera.
Sanghera says it’s also the way to qualify for the largest mortgage.
“Canada’s new underwriting rules require client’s debt service calculations to be done at either the BOC qualifying rate (5.34 per cent) or at the contract rate plus 2 per cent,” says Sanghera.
“So on RBC’s new 5-year ‘special’ the client will have to qualify at 3.64+2= 5.64 per cent which artificially lowers what the client can qualify for.”