Real Estate

Locked: Five-year fixed mortgage rate in Canada falls to 1.99% for first time

  • Last Updated:
  • Jun 25th, 2020 1:18 pm
Deal Fanatic
Feb 22, 2011
7310 posts
7810 upvotes
Toronto
VanByTheRiver wrote: If you borrow at 3% to gain exposure to 2%, you are losing 1% of every dollar borrowed - the loss gets compounded too. Real estate as an investment only makes sense if appreciation + rent exceeds costs. If you own your own home then rent is 0 - so if appreciation = inflation then it's a losing investment. However the benefits (security + ownership) greatly outweigh that cost depending on your personality (I'd happily forfeit returns for ownership).

On the flipside, the alternative to owning renting, which is generally more expensive than owning (sunk costs of owning = interest + property tax + maintenance) - which made ownership a virtual no-brainer until Jan 2020 when cap rates become roughly equal to interest rates.
My initial comment was a reply to someone saying that this is almost free money because it's at inflation so my comment was if mortgage interest equals inflation. My point was just with leverage and time if mortgage interest equals inflation you are almost living for free given the nature of a mortgage and the compounding effect of inflation.
Member
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Oct 31, 2019
298 posts
316 upvotes
mazerbeaner wrote: Here is a simple example. I purchase a home for $500k and with 5% down 2% mortgage 2% inflation.

After 25 years I have paid $128,992 in interest but have gained $320,303 in appreciation.

Assuming property tax and maintenance of 2% each and you are basically covering all the unrecoverable costs even if housing just keeps up with inflation. In reality this is not going to happen though, assets usually outpace inflation. In Toronto for 80 years the median and mean increase has been over 7%.

And if you are young like me and plan on staying 50 years it's even more profitable because that appreciation just for 2% inflation would come to $845,794. That is on an initial investment of $25,000.
Yes but in your example where interest = inflation the positive returns comes from the equity portion of ownership. So in year 1 your return would be 5% * 2% = 0.1%. As the mortgage is paid down you will earn 2% * whatever the equity in the house is.

I'm not disputing that owning your home is a good decision, my point was that gaining leveraged exposure to inflation is not a good thing when interest > inflation (which it always should be; otherwise the bank is losing money in real terms by making a loan, which would be nonsensical). Levered exposure to APPRECIATION has been an absolutely phenomenal thing in the past two decades; I just don't think it can realistically continue without society falling apart.
Deal Fanatic
Feb 22, 2011
7310 posts
7810 upvotes
Toronto
VanByTheRiver wrote: Yes but in your example where interest = inflation the positive returns comes from the equity portion of ownership. So in year 1 your return would be 5% * 2% = 0.1%. As the mortgage is paid down you will earn 2% * whatever the equity in the house is.

I'm not disputing that owning your home is a good decision, my point was that gaining leveraged exposure to inflation is not a good thing when interest > inflation (which it always should be; otherwise the bank is losing money in real terms by making a loan, which would be nonsensical). Levered exposure to APPRECIATION has been an absolutely phenomenal thing in the past two decades; I just don't think it can realistically continue without society falling apart.
I mean it's really a pedantic and kind of useless debate. Leverage is a double edged sword of course and will hurt you if prices go down or rates go up.

I think it will continue given modern economic theory and the free printing of money. Society won't collapse there will just be a displacement of those with less means out of HCOL areas into lower cost of living areas. Or an increase in homelessness like there are in many other cities.
Sr. Member
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Dec 2, 2008
778 posts
290 upvotes
ttoommyy wrote: Would banks/lenders offer the same rate if the house is for rental purpose? If not, how much higher the rate will be?
Nope. Mortgage rates on rentals are higher than those of owner occupied
Member
User avatar
Oct 31, 2019
298 posts
316 upvotes
mazerbeaner wrote: I mean it's really a pedantic and kind of useless debate. Leverage is a double edged sword of course and will hurt you if prices go down or rates go up.

I think it will continue given modern economic theory and the free printing of money. Society won't collapse there will just be a displacement of those with less means out of HCOL areas into lower cost of living areas. Or an increase in homelessness like there are in many other cities.
This is effectively an investment forum....understanding the components of return is pretty important imo. If you're expecting inflation to equal 2% and interest rates to equal 3-4% then one should understand that a leveraged bet on an asset that earns inflation can be expected to lose 1-2% per year on every dollar of debt. I've heard the argument before that borrowing at 5% down is basically like getting a 40% return on your money (20 * 2% inflation) but I think that's a misleading way of looking at it.
Deal Fanatic
Feb 22, 2011
7310 posts
7810 upvotes
Toronto
VanByTheRiver wrote: This is effectively an investment forum....understanding the components of return is pretty important imo. If you're expecting inflation to equal 2% and interest rates to equal 3-4% then one should understand that a leveraged bet on an asset that earns inflation can be expected to lose 1-2% per year on every dollar of debt. I've heard the argument before that borrowing at 5% down is basically like getting a 40% return on your money (20 * 2% inflation) but I think that's a misleading way of looking at it.
If we are talking about expectations I don't expect interest rates to be 3-4% for a very long time. I also expect a higher than normal level of inflation in the near future given the government just added over $300 billion CAD to money supply. They could have went with bonds but they chose not to. This was the first time Canada ever did QE, we aren't living in normal times. We have literally a record low interest rate just announced for mortgages. This is all unprecedented. And all of it is punishing savers. It seems very obvious to me the government objective is to outgrow debt, even the way JT talks about the budget balancing itself. They have no intention of being reasonable with finances. I only see one future ahead, higher inflation and a devalued currency. Can't wait to get 50 cents US on my dollar.
Member
Oct 12, 2005
373 posts
313 upvotes
Lower Mainland BC
ttoommyy wrote: Would banks/lenders offer the same rate if the house is for rental purpose? If not, how much higher the rate will be?
Depends on the lender. Canada Life has the same rates for owner occupied properties and house rentals (but not condos); HSBC charges 0.1% premium on their rate for rentals. Other FI’s charge a bit more of a premium.
Deal Addict
Apr 4, 2017
1209 posts
304 upvotes
Toronto
Wow 1.99? I don’t see this anywhere

Is 1.99% when doing 20% down payment?
Member
Oct 12, 2005
373 posts
313 upvotes
Lower Mainland BC
ysl5710 wrote: Wow 1.99? I don’t see this anywhere

Is 1.99% when doing 20% down payment?
No the 1.99% fixed is only for CMHC insured. However there are rates as low as 2.09% fixed for non-insured 20%+ down through some brokers. Most lenders do not advertise their best rates online. See: official-mortgage-rates-thread-351105/
Deal Fanatic
User avatar
Feb 2, 2014
8329 posts
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Toronto
You can now get 1.94% 5-year fixed on an insured mortgage and 1.99% 5-year fixed on a non-insured mortgage :)
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
Member
Jul 15, 2019
366 posts
255 upvotes
CdnRealEstateGuy wrote: You can now get 1.94% 5-year fixed on an insured mortgage and 1.99% 5-year fixed on a non-insured mortgage :)
Hoping rates like this hold up into 2021.
Newbie
Jan 15, 2017
72 posts
65 upvotes
CdnRealEstateGuy wrote: You can now get 1.94% 5-year fixed on an insured mortgage and 1.99% 5-year fixed on a non-insured mortgage :)
Nationwide? If not, what's the best rates in QC?
Deal Addict
User avatar
Nov 15, 2013
1820 posts
1638 upvotes
Toronto, ON
freeman93 wrote: Hoping rates like this hold up into 2021.
Will go even lower.
Deal Fanatic
Oct 7, 2007
7616 posts
3689 upvotes
Why not must make it zero percent and just have people make payments on the principal? Sure house prices will go a little higher than they are now because everyone will have more purchasing power but what a great deal on the interest?

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