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Rates are based on a home value of $500,000
Rates are based on a home value of $500,000
Updated
A mortgage with a locked-in interest rate, meaning the rate will not change during the term of the mortgage is known as a fixed-rate mortgage. A 1-year fixed rate mortgage is the mortgage rate that remains unchanged for a period of 12 months. The homeowner will not have to worry about changes in the overnight rates by the Bank of Canada for that one-year period or any changes in the economy that impact mortgage interest rates.
As per the Canada Mortgage and Housing Corporation (CMHC)’s Residential Mortgage Industry Report, the fixed-term lending rate has been lower than the variable rate since the third quarter of 2022. Moreover, since June 2022, federally regulated financial institutions have lent more funds for new and renewed mortgages under fixed-rate agreements than variable-rate agreements.
However, fixed-rate mortgages of 5 years or more are no longer the most popular option. Since September 2022, new and renewed mortgages under fixed-rate agreements between 3 and 5 years, and between 1 and 3 years have been borrowers’ preferred choice. Borrowers’ expectations that the policy interest rate will decrease from its 15-year high in the next few years, coupled with minimal rate differences between the different agreement lengths, are driving factors behind this shift.
One-year fixed mortgages are the shortest fixed-rate mortgages a prospective homeowner can get. Current 1-year fixed mortgages are popular for many reasons:
For the risk-averse person, a 1-year fixed mortgage rate in Canada allows a borrower to avoid the risk of a rate increase during the mortgage term. But there are risks, of course.
Suppose you have a $400,000 mortgage with a 25-year amortization schedule, and you take a 1-year fixed mortgage with an interest rate of 5.65%. A year passes, and now rates are 200 basis points higher. When your mortgage renews, your payments will increase by $472 or $118 per month per $100,000 borrowed.
Most Canadians choose longer terms (the most popular term is five years) and put up with a slightly higher rate to avoid such problems at renewal. The amount of paperwork that accompanies new mortgage negotiations is also inconvenient for most.
One-year fixed mortgage rates in Canada, like all interest rates, follow government bond yields, except in this case, they follow 1-year government bond yields.
Bond yield is a way of measuring the annual return on a bond investment. A bond's yield is expressed as a percentage. At the time of issuing, each bond comes with a face value and a fixed amount of interest amount that it pays, known as its coupon rate. Then when bonds are bought and sold on the open market, they may sell for above or below the face value.
Banks are quicker to raise their fixed mortgage rates and slower to lower them in relation to bond yield movements. They can’t be too reactive to changing market conditions if they're to remain solvent.
As inflation has steadily risen, so have interest rates. As a result, bond yields have been steadily climbing since late spring 2022.
Bond prices have an inverse relationship with mortgage interest rates. As bond prices increase, mortgage interest rates go down and vice versa. This is because mortgage lenders tie their interest rates closely to Treasury bond rates.
When bond interest rates are high, as they are becoming now, the bond is less valuable on the secondary market. This causes mortgage interest rates to rise. The value of each bond goes up when bond interest rates fall again. This causes mortgage lenders to lower their rates. However, we are still in a situation of rising interest rates and bond yields for the time being.
| Date | 1-year conventional mortgage rate | 1 - 3 year Government of Canada marketable bonds (average yield) |
|---|---|---|
| 1/2/2019 | 3.64 | 1.85 |
| 1/1/2020 | 3.64 | 1.68 |
| 1/6/2021 | 3.09 | 0.18 |
| 1/5/2022 | 2.79 | 1.01 |
| 4/20/2022 | 3.09 | 2.51 |
| 6/1/2022 | 3.79 | 2.74 |
| 7/13/2022 | 4.74 | 3.27 |
| 9/7/2022 | 5.19 | 3.57 |
| 10/26/2022 | 6.09 | 3.87 |
| 12/7/2022 | 6.09 | 3.74 |
| 1/25/2023 | 6.34 | 3.74 |
| 3/8/2023 | 6.34 | 4.25 |
| 4/12/2023 | 6.29 | 3.75 |
| 6/7/2023 | 6.94 | 4.54 |
| 7/12/2023 | 7.69 | 4.62 |
| 9/6/2023 | 7.89 | 4.66 |
| 10/18/2023 | 8.09 | 4.93 |
Source: Bank of Canada
All fixed-rate mortgages are influenced by the bond market. Mortgage lenders invest in bonds and mortgages for profit. The profits are then recycled to purchase more bonds and issue more mortgages. Here's a list of the sources lenders rely on to finance mortgages:
To figure out the interest amount to charge on a fixed-rate mortgage, lenders look to the interest they're earning on bond investments.
The government bond market in Canada broadly dictates fixed-rate mortgage rates. A five-year fixed rate, for instance, will track the five-year Government of Canada bond.
When bond yields rise, so do fixed-mortgage rates.
In the two years following the emergence of the COVID pandemic, Canada's economy expanded beyond economists' expectations. Consumer demand for goods (including houses) was overwhelming, causing inflation to rise. In 2022, the Bank of Canada began an aggressive rate increase strategy to help bring down demand and inflation.
The Bank of Canada's decision to raise overnight rates led to a rapid surge in bond yields. As the bank drove up the cost of borrowing, the interest paid on bonds began going up, and mortgage rates quickly followed.
This was a stark reversal from late 2020 to early 2021, when bond yields and, conversely, mortgage rates bottomed. Mortgage lenders offered some of the lowest mortgage rates in history during this period.
Inflation is expected to decrease gradually due to higher policy interest rates and rising long-term bond yields, which are dampening demand.
Several factors contribute to the rise in long-term bond yields, including increased real yields, a rising term premium, fiscal deficits, and changes in the neutral interest rate.
The Bank of Canada’s monetary policy tightening has also affected global financial markets, potentially impacting equity and asset prices, which, in turn, can influence investment and consumption, both domestically and internationally.
The Bank of Canada has increased interest rates 10 times since March 2022, leading to a slowdown in mortgage credit growth and reduced demand for housing and big budget items, resulting in a 33% drop in housing resales and a 10% decrease in house prices since February 2022.
Concisely, prices are going down a bit, it's more expensive to borrow money, and the housing market isn't as hot as it used to be. This is all because of actions taken by the government to control the economy.
Advantages of a 1-year fixed mortgage
Here's the upside to choosing a 1-year fixed mortgage:
Cons of a 1-year fixed mortgage:
The following are some of the potential drawbacks of choosing a 1-year fixed mortgage:
If you want to try and guess the trend for 1-year fixed rates, you can watch Canada's 1-year Treasury bill yield.
Note that this doesn't yield a forecast for future rates, but over the long term, 1-year fixed rates track the 1-year Treasury bill yield fairly closely.
According to the Bank of Canada, the long-term bond yields have increased sharply since July 2023, and the higher levels are expected to persist in the coming months. Monetary policy is tight in most advanced economies, and bond yields have risen sharply in recent weeks, reaching levels not seen since before the 2008-2009 global financial crisis.
If the increase in yields proves to be larger or more persistent than expected, equity and other asset prices could be negatively impacted further. This, in turn, would weigh on investment and consumption both abroad and in Canada.
One-year fixed rates have one of the shortest commitments of any mortgage term, which is why they often have the lowest rates on the market, even lower than floating rates at times.
Studies show that 1-year terms perform similarly to variable-rate mortgages regarding total interest cost.
Here are some 1-year fixed-term tips and how to make the most of this short-term mortgage product:
We've got answers to some of the most common questions about short-term mortgages.
Finding the best current 1-year fixed mortgage rate in Canada starts with comparison shopping. RATESDOTCA is the one-stop shop that allows you to compare the best rates in the easiest way possible. Major banks and mortgage brokers are at your fingertips and ready to help.
Much like any other mortgage term, you will need to renegotiate or find new financing terms for a new mortgage. You may choose another 1-year fixed mortgage rate, should that satisfy your short-term lending needs. Or, if you're ready to commit, you may choose a longer-term mortgage rate. It all depends on your needs and the cost of borrowing at the end of your 1-year term.
A mortgage refinance can be done anytime, not just at the end of your term. You can take out money for things such as debt consolidation. However, you will be penalized for refinancing before your term ends. Keep in mind that over the short term, interest rates can fluctuate, especially in today's market climate.
A mortgage rate lock allows you to reserve an interest rate for a set period while renewing, refinancing or applying for a mortgage. Mortgage rate locks allow prospective homeowners to get the best mortgage rate available if interest rates increase.
Shivani Kaul is a communications professional specializing in editing, writing, and content strategy, with a particular focus on personal finance and mortgages. Her expertise stems from a strong educational background and diverse international experience.Academically, Shivani holds a Digital Marketing Management certificate from the University of Toronto, a Business Communications certificate from the University of British Columbia, a Master's degree in Mass Communication from Symbiosis Institute of Media and Communications, and a Bachelor's degree in English from the University of Delhi.
Her professional journey is marked by significant roles in prestigious media organizations across multiple countries. She has previously worked as an editor at PMNA/The Canadian Press for The Globe and Mail, Toronto Star, and freelance writer for the Investor's Digest of Canada. Additionally, Shivani has contributed her skills to reputed news media groups in India and the Middle East. Her expertise in SEO ensures that the content she produces not only engages readers but also achieves optimal visibility in digital spaces.
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