Fixed mortgage rates hit two-year low

Mortgage rates in Canada have been ultra-low for more than 10 years, but in most cases the variable rate has still beat out the fixed rate. Until now.Recently, the Canada five-year benchmark bond yield fell to 1.29 per cent – the lowest level in two years. The big banks have responded by slashing fixed rates on mortgages. Anyone shopping for a mortgage right now should take a closer look at the five-year fixed. This could be a big money saving option. That's because in many cases, it's cheaper than the variable rate. It also means peace of mind knowing your monthly payments won't change for the next five years

How low are fixed rates

To put fixed rates into perspective, the five-year benchmark bond yield is lower compared to last year at this time. Then it would cost up to 2.06 per cent. It is also much lower than the long term average of 3.52 per cent. This is leading big banks to ramp up their mortgage business. As is always the case, banks are enthusiastic to sell mortgages and are willing to offer the lowest rate to get your business. With low bond yields, many are offering rates lower than three per cent fixed.

Good for homebuyers

This is all great news for anyone shopping for a mortgage right now. If you have job security, fixing your rate, rather than going variable (for the next five years), could mean better cash flow if rates were to rise.

Looking at variable, too

It's important to understand how variable rate works as well. The Bank of Canada's floating benchmark rate is tied to the variable rate. When the Central Bank raises rates, commercial banks raise prime, which affects your floating rate loans, such as variable rate mortgages and lines of credit. The Bank of Canada raised rates five times between the summer of 2017 and the fall of 2018, but has since held rates steady at 1.75 per cent. In the past, the Bank has cited global trade tension between the U.S., low oil prices and record high debt levels as a reason to leave rates unchanged.

Not all good news

It's important to note that plunging bond yields may be great for borrowers in the market for a mortgage right now, but they do spell trouble for the economy. Low bond yields often indicate a slowing economy. It can also encourage Canadians to pile on more debt. If trade tension were to ease and the new United States, Canada and Mexico agreement was to firm up, bond yields would rise. This would push fixed rates up right away.

Turning attention to the U.S.

So far, the U.S. Federal Reserve has held rates steady, but has indicated it is open to a rate cut if the economic conditions allow it. If the U.S. Federal reserve was to cut rates, that would put pressure on the Bank of Canada to do the same.

Do your own stress test

Regardless of how low of a rate you secure, you still have to pass the federal stress test. That is the higher of the following — a rate two points higher than your contract rate or the Bank of Canada conventional mortgage five-year rate.It's important not to get carried away with how low the rate it is; calculate your affordability, not only using the stress test, but also by adding in the cost of emergency repairs and extenuating circumstances. All of these events can cost a lot of money. If you're already stretched financially, managing them can be difficult. Make sure you can afford the mortgage you're taking on for the long term.Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG's Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.