The biggest flop in summer blockbusters is the housing market.
When the Bank of Canada finally began the process of cutting its trendsetting overnight rate a few weeks ago, it was expected that lower rates would filter into mortgages and improve affordability. So much for the hype.
Prices remain at elevated levels and mortgage rates have come down only marginally. If you want or need to buy now, affordability may depend on getting the best possible mortgage rate discount.
To set the scene on mortgage rates, let’s go back to the June 5 move by the Bank of Canada to lower its overnight rate by 0.25 of a percentage point. This rate cut – the first drop in four years – was immediately mirrored in the cost of variable-rate mortgages, which are out of favour right now.
Buyers and people renewing mortgages prefer the certainty and immediate savings of fixed-rate mortgages, even though they have barely moved since the recent Bank of Canada rate announcement. Victor Tran, a mortgage agent with TMG The Mortgage Group, pegs the decline at between 0.05 and 0.1 of a percentage point.
“We were expecting a little more of a drop,” Mr. Tran said. “Rates are still high on the fixed- and variable-rate side. I think there needs to be more rate drops, maybe to as little as 4 per cent, to really spur a lot of activity.”
At TMG, the popular three-year fixed rate was posted online at 5.09 per cent at mid-week and the five-year fixed rate was at 4.64 per cent. Special rates advertised online by banks were as low as 5.39 per cent for three years and 5.14 per cent for five years. Five-year rates as low as 4.84 per cent were available for borrowers who put down less than 20 per cent and thus have to pay for mortgage default insurance.
Mr. Tran said special rates advertised on websites are fairly decent, but suggested borrowers try to negotiate a better deal.
“Some banks are very cautious in not offering the lowest rate upfront or publishing it,” he said. “They say, we can likely match a competing rate or offer even something better than the competitor. We just need to see the deal.”
Here’s what Mr. Tran said banks are looking for when considering whether to offer top discounts:
- Credit score: 700 or higher
- Size of the mortgage: The more you borrow, the better your chances of a maximum discount
- Closing date: Sooner means more discount
- Opportunity to cross-sell other bank products: Offers may apply to people who have a chequing account with the bank and possibly an additional product like a credit card.
Note that banks are prohibited under the Bank Act from coercive tied selling, where clients are pressured to buy a product or service as a condition of receiving another product or service.
Mr. Tran said three-year fixed-rate mortgages remain most popular right now – he hasn’t sold a variable-rate mortgage in a few months. Five-year mortgages offer a lower rate, but you pass up the opportunity to renew any time soon at a potentially lower rate.
For lenders, five-year mortgages offer helpful stability. That’s why, according to Mr. Tran, a handful of lenders who work through brokers are offering extra commissions to these agents when they sell five-year fixed mortgages.
Mr. Tran said a mortgage broker could take some of this extra commission and exchange it for a better rate discount for the client. This is called a “buy down.”
The plot line in the housing market will get interesting if sales keep slipping and the number of homes for sale keeps rising. Prices could head lower, improving affordability levels that were recently described by RBC Economics as “close to the worst point ever nationwide.”
Lower mortgage rates would be even more helpful for improving affordability than price declines, but so far they’ve been elusive. Negotiating a solid mortgage discount is the next best thing.
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