For the first time in history, you can now get a mortgage in Canada with an interest rate under one per cent.
HSBC Canada’s 0.99-per-cent five-year variable-rate mortgage is “as close to free money as Canadian (lenders) have ever been,” Rob McLister, founder of mortgage comparison site Ratespy.com, wrote in a blog post.
But there’s a catch: The interest rate is available only on “high-ratio” mortgages, meaning mortgages where the borrower puts less than 20 per cent down.
Watch: What happens when mortgage deferrals end? Story continues below.
If there’s one reason for that, it’s that these mortgages pose less risk to the lender. Mortgages with less than 20 per cent down have to be insured, either by the government-run Canada Mortgage and Housing Corp., or by other insurers such as Genworth. They cover a lender’s losses if a borrower defaults, essentially making these mortgages risk-free to the bank.
And there’s another catch: The fact it’s a variable-rate mortgage means the interest rate can go up if HSBC raises its own prime lending rate, which typically happens when the Bank of Canada (BoC) raises its posted rate.
There’s little chance of that happening in the near term, as the BoC has signaled it plans to keep rates low for the next few years as the economy recovers from the pandemic. But what things look like five years from now ― at the end of the mortgage term ― is much harder to guess.
“A 0.99-per-cent rate will likely put you way ahead of the game for at least one to two years,” McLister wrote. “The question is, what do you do when rates march higher.”
McLister isn’t advising borrowers to either jump at the offer or reject it, but notes that whether or not it makes sense to take this depends on when and how much interest rates rise in the future. Beating a five-year fixed rate mortgage would require a certain amount of good timing ― and “don’t count on that,” McLister wrote.
Though it can reduce your monthly payments, HSBC’s discount mortgage won’t let you buy a house for more than you could have otherwise afforded. All insured mortgage borrowers have to pass the federal mortgage stress test, meaning borrowers have to qualify at the Bank of Canada’s posted rate of 4.79 per cent, regardless of the rate they’re being offered.
Lower mortgage rates, higher house prices
Mortgage rates have been grinding downwards since the pandemic began earlier this year, when the Bank of Canada pushed its key lending rate down to 0.25 per cent, calling the rate the lowest it can go.
The discount rate on a five-year variable mortgage ― the most common kind in Canada ― has fallen to 1.39 per cent, according to rate comparison site Ratehub.ca, a record low and down from 2.29 per cent a year ago.
On a mortgage on an average-priced house in Canada ($607,000) with 20 per cent down, that difference in rates amounts to a savings of $210 on a monthly payment.
Housing market experts say more affordable monthly payments are a principal reason why Canada’s house prices have soared during the pandemic.
Even with the average selling price up 15.2 per cent in the past year, housing affordability has actually improved in recent months because monthly payments have come down, according to National Bank of Canada’s latest affordability report.
“Despite rising home prices, affordability is set to improve in the fourth quarter as homebuyers have enjoyed a further decline in mortgage interest rates,” economists wrote Alexandra Ducharme and Kyle Dahms wrote in the report issued in late November.
Still, they see some risks of a slower housing market next year.
“With extraordinary government support to household income phasing out and (mortgage) payment deferrals not at play in 2021, the housing market is facing some headwinds given the still recovering labour market,” they wrote.
Additionally, lower immigration due to travel restrictions could mean fewer new households and lower demand for housing, they noted.