Natasha Shaw

In January, Bank of Montreal introduced a 5-year fixed rate mortgage at 2.99%, which was the lowest advertised 5-year fixed rate from any major bank in Canadian history. Immediately, the other big banks advised their mortgage force to match their rates in an effort to compete.

Since mortgage rates were already at historically low levels, why would the banks do this? Unlike shorter-term variable mortgage rates which are tied to the Bank of Canada rate, longer-term fixed rates are determined by bond yields. Here’s how it works.

The continuing economic crisis in Europe, shaky stock markets, and volatility in global currency and commodity markets have made investors very nervous. Since Canada’s economic condition is relatively better than many developed countries, investors have been rushing to buy relatively safer Canadian bonds. All that demand means the issuers of the bonds can pay lower interest rates (unlike the very high rates that European bonds are forced to pay). This means the cost of money in Canada is getting lower so the banks can afford to lower their mortgage rates.

The next and more important question is: should I break out of my current mortgage to take advantage of these lower rates? Here, the answer is equally complicated. Most of the new fixed rate mortgages have several restrictions (such as BMO) —limited amortization choices (25 years), no portability, prepayment privileges of only 10%, etc.—so you have to decide whether they’re right for your needs. You also have to consider the penalty you’ll pay to break out of your existing mortgage, which can be tens of thousands of dollars in some cases.

The only way to know for sure if these new low-rate mortgages can save you money in the long term is to review your financial situation and current mortgage. I’d be happy to do a thorough no-charge analysis to help you see if refinancing makes sense for you. If that interests you, contact me today!