Plunging oil prices are already having an impact on mortgage rates and the Canadian real estate market. Last month it came as a complete shock to most when the Bank of Canada cut interest rates. At the start of 2014, nobody was forecasting an interest rate cut; it was quite the opposite. Many economists were predicting the Bank of Canada would start increasing the overnight lending rate by 25 basis points as early as mid-2015. Unfortunately, declining oil prices threw a monkey wrench into those plans. Oil fell from a peak at above $100 to below $50 a barrel in only a few short months. The decline in oil prices look to have taken a momentary pause, closing above $50 a barrel. Let’s take a look at how oil prices have impacted mortgage rates.
Homeowners with Variable Rate Mortgages
Homeowners with variable rate mortgages are benefiting immediately from lower oil prices. Mortgage lenders set variable mortgage rates based on prime rate, plus or minus a spread. While the spread stays the same, mortgage lenders adjust prime rate based on changes in the overnight lending rate.
In response to the Bank of Canada lowering the overnight lending rate by 0.25 percent, mortgage lenders lowered prime rate by 0.15 percent. This lowered prime rate from 3 percent to 2.85 percent. Although this doesn’t match the full 25 basis points rate cut, it still means more money in the pocket of homeowners with variable rate mortgages.
For example, if you have a variable rate mortgage of prime rate, minus 0.8 percent, your mortgage rate was 2.2 percent before the rate cut; after the rate cut it’s only 2.05 percent. That means more of your mortgage payment goes towards principal and less towards interest. By keeping your regular mortgage payment amount the same, not only will you save on interest, you’ll pay off your mortgage sooner.
Homeowners with Fixed Rate Mortgages
Homeowners with variable rate mortgages aren’t the only ones benefiting from declining oil prices. Low oil prices are also a boon for fixed rate mortgages. If you’re house hunting or renewing your fixed rate mortgage, you’ll enjoy some of the lowest fixed mortgage rates in history.
Mortgage lenders set fixed mortgage rates based on government of Canada bond yields. With the decline in oil prices, government bond yields are falling in response to the surprise rate cut. If you signed up for a fixed mortgage at a higher rate and have two to three years left, it might be worth considering breaking your mortgage and locking in at a lower rate. Just be sure to sit down with a mortgage broker and do the math to see if the mortgage penalty you’ll pay will be worth it.
If you’re in the market for a home this spring, consider taking advantage of rock bottom fixed mortgage rates. Although variable mortgage rates may be lower, for a lot of first-time homebuyers, the stability of fixed mortgage rates are often worth a slightly higher rate.