Interest Rates Are Down Even Further; Can You Qualify for a Residential Mortgage?
Federal Government Takes Action to Help Economy
Between early 2006, when U.S. housing prices peaked, and early 2012, when the market bottomed, U.S. housing prices plunged 33%; that was greater than the 31% decline U.S. housing prices experienced during the Great Depression. Many were faced with paying off mortgages worth more than the value of their homes and more yet defaulted on their loans and lost their properties.
To help Canada navigate a recession and avoid a similar collapse, the federal government implemented a number of new measures. First, it initiated a number of tighter lending rules and guidelines that affect how people qualify for government-backed insured mortgages.
And second, to help kick-start the economy, the Bank of Canada lowered its key lending rate; the lending rate impacts short- and long-term interest rate loans like mortgages. Lower interest rates make it cheaper for businesses and people to borrow money from the country’s many lending institutions.
Bank of Canada Lowers Lending Rate
In April 2009, the Bank of Canada lowered its key lending rate a quarter percentage point to 0.25%. By late 2010, against the backdrop of a gradually improving economy, the Bank of Canada had raised it to one percent, where it was pegged until January 2015.
With the North American economy getting stronger, most economists expected the key rate to start creeping higher in the second half of 2015. That didn’t happen; the recent drop in oil prices and slower economic growth forced the Bank of Canada to cut its key lending rate by a quarter of a percentage point to 0.75%. Prolonged low oil prices could force the Bank of Canada to cut the key rate again when it next meets in March.
Near-record-low interest rates are used to help keep the Canadian economy moving. The ultra-low interest rate environment also makes home buying more attractive, as the average five-year mortgage rate in Canada is at a record-low 4.79%.
Government Introduces New Lending Rules & Guidelines
Since 2008, the federal government has made several changes to the rules for government-backed insured mortgages. These rules affect home buyers with less than a 20% down payment.
Some of the biggest changes included reducing the maximum amortization period for a government-insured mortgage from 40 years to 25 years. Home buyers must also have a down payment of at least five percent of the purchase price; previously, Canadians could purchase a home with no down payment. For an investment property (non-owner occupied), a minimum down payment of at least 20% is now mandatory.
The Bank of Canada also reduced the upper limit that Canadians can borrow against their home equity to 80%. Previously, homeowners could borrow as much as 95% of the value of their homes when refinancing.
These initiatives were put in place to make the Canadian housing market more stable, but because larger down payments and shorter amortization periods are now the norm, fewer people could qualify for insured mortgages in Canada.
Some feared that borrowers would end up postponing the purchase of a home or buying one that is less expensive. But the fact of the matter is that many potential home buyers have taken advantage of the low-interest-rate environment to pay off their debts and save for a home.
A survey conducted since the unexpected rate cut was announced found that approximately 15% say cheaper mortgage rates will allow them to get onto the property ladder sooner than expected. In addition, nearly half of respondents expect to buy a home in the next five years.
Canadalend.com Helps Homebuyers Find the Right Mortgage
While the new lending rules make Canada’s housing market more secure, the truth is that Canadians have always been prudent when it comes to borrowing. In fact, only less than half of one percent of all mortgages (0.28%) are in arrears.
No matter where interest rates are at, the licensed agents at Canadalend.com will help you find the most competitive mortgage products. We don’t just look at mortgage rates; we look for one that fits your long-term financial and lifestyle needs.
Unlike Canada’s big banks, which only promote their own lending products, Canadalend.com agents are independent. That means they have your best interest in mind in addition to their access to hundreds of different lends.
To see what kind of loan you qualify for, contact the mortgage experts at Canadalend.com today or apply online and one of our lending specialists will help you set up an appointment for a free, personal consultation.
“Bank of Canada lowers overnight rate target by 1/4 percentage point to 1/4 per cent and, conditional on the inflation outlook, commits to hold current policy rate until the end of the second quarter of 2010,” Bank of Canada web site, April 21, 2009; http://www.bankofcanada.ca/2009/04/fad-press-release-2009-04-21/.
“Bank of Canada increases overnight rate target to 1 per cent,” Bank of Canada web site, September 8, 2010; http://www.bankofcanada.ca/2010/09/fad-press-release-2010-09-08/.
“Bank of Canada lowers overnight rate target to 3/4 per cent,” Bank of Canada web site, January 21, 2015; http://www.bankofcanada.ca/2015/01/fad-press-release-2015-01-21/.
Altstedter, A., “Mortgage rate thaw renews fears of Canadian housing bubble,” The Financial Post , January 21, 2015; http://business.financialpost.com/2015/01/21/mortgage-rate-thaw-renews-fears-of-canadian-housing-bubble/.
Fekete, J., “Ottawa tightens mortgage rules to avert household debt crisis,” The Financial Post , June 21, 2012; http://business.financialpost.com/2012/06/21/ottawa-cuts-mortgage-amortizations-to-25-years/.
“Number of Residential Mortgages in Arrears,” Canadian Bankers Association web site; http://www.cba.ca/contents/files/statistics/stat_mortgage_db050_en.pdf, last accessed February 2, 2015.