Where mortgage rates are headed in 2021
December 16, 2020
Mortgage rates have been a popular topic of conversation among Canadians, as they have continued to drop over the last 20 years – especially this year. Although rates temporarily increased above the three-per-cent mark at the beginning of 2019, they quickly came back down by the end of the year. Adding a global pandemic into the mix, and we have seen rates consistently drop for the majority of 2020. Given that the housing market in Canada is a keystone to the economy, the Bank of Canada has stepped in to purchase mortgage bonds, which lowered interest rates to stimulate homebuying. Today, as we continue to navigate through this pandemic, mortgage rates continue to sit at record lows.
Where will rates go in 2021?
During normal times, interest rates can be impacted by a series of social, political and economic factors, as well as rate changes from our U.S. neighbours. For example, the five-year Canada bond yield recently increased six basis points to 0.46 per cent on positive news of a potential COVID-19 vaccine and Joe Biden’s presidential win. Oftentimes, increases in bond yields are a leading indicator of rate increases. Conversely, in a pandemic environment, where unemployment is high and economic growth is weak, interest rates tend to be lower to stimulate homebuying, which is what we’ve seen over this last year. As a result, the government introduced a series of stimulus efforts that have led to consistent interest rate decreases.
As we head into 2021, the outlook remains uncertain, as the prospect of a viable vaccine has made things a little more optimistic than expected. If this vaccine works and decreases the number of COVID-19 cases in the first half of the new year, this could increase employment and positive sentiment in the marketplace, while decreasing the need for stimulus efforts. In this scenario, this could lead to slightly higher rates, but nothing too drastic, as recovery takes time.
Given the effect COVID-19 has had on Canadians and the marketplace at large, it’s unlikely we’ll see major changes in interest rates as we head into the new year. Instead, it’s more likely that we will see stability and maybe slight increases or decreases based on seasonality.
Should you buy now while rates are low, or wait?
Many homebuyers will pay close and attention and try to time their home purchase around mortgage rate increases or decreases. However, if you’re ready to buy a home, you shouldn’t let rates be the main determining factor. The truth is, no one has a crystal ball and you could find yourself spending more money by waiting things out. Home prices have consistently gone up over the last 20 years, and rates can unexpectedly increase at any time, so waiting for a decrease in interest rates might actually cost you more. That’s why the best thing to do is buy a home when you’re ready, and really focus on locking in a holistic full-feature mortgage that will save you the most money.
Consider key features with your mortgage
While being conscious of interest rates is astute, you also want to take into consideration the features of your mortgage. Having a full-feature mortgage that includes prepayment privileges and low penalties is essential. It’s one of the best ways to save more money in the long-run and provide more flexibility with your mortgage. While a rate can save you hundreds, key features can save you thousands. Choosing the wrong lender or option can leave you with high penalties if you ever need to break your mortgage, whether you’re refinancing or selling your home. Further, these penalties can cost you tens of thousands of dollars. That’s one of the reasons why our team at Homewise works with more than 30 banks and lenders. We actively shop around for borrowers to find them the best tailored options and provide a holistic view of what’s available to ensure cost savings today and into the future.
At the end of the day, there is an old adage that says, “The best time to buy a home was yesterday.” Cheeky lines aside, trying to time the market is never a simple science. While rates could fluctuate in the coming months and years, homebuying is a long-term decision. So, it’s important to buy when you are ready and consider all variables.
About Jesse Abrams
Jesse Abrams is Co-Founder at Homewise, a mortgage advisory and brokerage firm based in Toronto. thinkhomewise.com