The Fate of Low Mortgage Rates

Mortgage Rates
Mortgage Rates

As the economy slowly crawls back to almost equaling the plateau it achieved five years ago, when the stock market crashed and the Eurozone kerfuffle plunged the financial world into chaos, one major issue ranking high on the scuttlebutt circuit surrounds what will happen to mortgage rates. It makes sense, since the housing and construction markets are primary indicators of the economy’s direction.

Many homeowners have benefited from the reduction in the rates over the years, particularly five-year fixed closed rates, which were as high as six per cent 10 years ago and have since dropped to more than half by the end of 2012. An even longer-term picture shows that current rates are barely a third of what they were even 20 years ago.

And those who’ve been shopping around since the beginning of 2013 can have their pick of even lower offerings from mortgage brokers and the big banks, which have been offering incentives as low as three per cent. Holders of variable mortgage rates, which at this writing enjoyed a range from 2.6 to 3.6 per cent in Calgary, are also breathing easy, while anticipating that the rates don’t climb anytime soon.

At this point, that’s not likely to happen. With the Bank of Canada rate at a record low hovering around the one-per cent mark and amid predictions that Gross Domestic Product will slowly crawl up to roughly two per cent, there’s no incentive to jack the rates up. That’s good news for first-time buyers, faced with tighter federal mortgage financing laws, and looking at existing rates as a way to handle payments in the wake of rising house prices.

Current homeowners will also enjoy the rates, making it easier to get a handle on their mortgages. Since interest is normally the first component of a mortgage that’s eventually paid off, a lower rate mean that their principal will be easier to tackle. And according to the Canadian Association of Accredited Mortgage Professionals, a record one-third of Canada’s six million mortgage holders Canadians are actually ahead of the curve when it comes to their payments.

Ironically, this is all happening when the average Canadian consumer debt is just below $26,000, cited a report by credit bureau TransUnion. The report, which excluded mortgages, stated that car purchases and renovations were two major sources of debt, financed by credit cards and lines of credit.

Arguably, lower mortgage rates are easier on the pocketbook and would allow consumers enough flexibility to pay off their credit cards. But should the rates start increasing, homeowners face a slippery slope in terms of repayment leverage. Many financial experts state households should be more financially savvy in terms of they should be spending their money and measuring their payments against existing cash flow for starters. Examining the interest in repaying lines of credit and credit cards as well as their mortgages is also strategically smart in terms of prioritizing what debt needs to be dealt with.

Even in Calgary, the strongest economy in Canada, it helps to plan ahead.

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