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Rates are based on a home value of $500,000
Rates are based on a home value of $500,000
Rates are based on a home value of $500,000
Updated
A 2-year fixed mortgage rate is a mortgage where the interest rate, and your monthly repayments, stay the same for two years. In return for paying a slightly higher interest rate than on variable rate mortgages you get the peace of mind of a locked-in rate.
Current 2-year fixed mortgages are popular for many reasons, which include:
For the risk averse person, a 2-year fixed mortgage rate in Canada allows a borrower to avoid risk of a rate increase during the term of the mortgage. However, 2-year fixed mortgage rates offer little rate protection in rising-rate environments compared to longer terms.
2-year fixed mortgage rates in Canada have grown in popularity over the past few years. While still not the most popular mortgage options, they represent a growing sector of the industry. Why?
Current 2-year fixed mortgage rates are comparable to longer term 4 and 5-year fixed mortgages. Locking in at a short-term offers the reassurance that your mortgage payments will not rise with the current Bank of Canada decisions but also allows you to be flexible and make changes should rates fall again in the not-so-distant future.
2-year fixed mortgage rates in Canada, like all interest rates, follow government bond yields, except in this case they follow 2-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 what is called a coupon rate, a fixed interest amount that is paid. 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. To stay solvent, they can’t be too reactive to changing market conditions.
As inflation has been steadily rising, so have interest rates to help slow demand and bring prices down. As a result, bond yields have been steadily climbing as interest rates have been rising since late spring 2022.
Bond prices have an inverse relationship with mortgage interest rates. As bond prices go up, 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.
Discounted 2-year fixed rates are currently at their lowest level in more than a decade.
They began the decade at around 2.75% and gradually trended downwards to just above 2.00% by 2016-17.
But in just the last three years, 2-year fixed rates reached highs of more than 3.00%. Compare that to nationally available discounted 2-year fixed rates of just 1.59% (for default-insured mortgages) and 1.84% (for uninsured mortgages), as of fall 2020.
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 more comprehensive list of the sources lenders rely on to finance mortgages:
To figure out what interest rate to offer on a fixed-rate mortgage, lenders look to the interest they’re earning on bonds.
Bond prices have an inverse relationship with mortgage interest rates. That means when bond prices go up, mortgage interest rates go down and vice versa.
During the first two years of the pandemic, Canada’s economy expanded. Consumer demand for goods (including houses) was so high it caused prices and inflation to rise. In 2022, the Bank of Canada began an aggressive rate increase strategy to help bring demand, and ultimately inflation, down.
The Bank of Canada has been raising overnight rates for banks as part of its strategy, and it’s affecting bond yields. The interest offered on bonds is going down, therefore, mortgage lenders are increasing rates on mortgage loans.
These are some of the advantages of a 2-year fixed mortgage:
The following are some of the potential drawbacks of choosing a 2-year fixed mortgage:
If you want to try and guess the trend for 2-year fixed rates, you can do so by watching Canada’s 2-year Treasury bill yield.
Note that this doesn’t yield a forecast for future rates, but over the long term, 2-year fixed rates do track the 2-year Treasury bill yield fairly closely.
Inflation continues to be high, and the Bank of Canada has indicated there may be more interest rate hikes ahead. With increased rates comes higher less demand for bonds/treasuries, ultimately dropping the price of bonds and raising interest rates, once again. There will be one more interest rate announcement in 2022 by the Bank of Canada on December 7.
For those choosing a 2-year fixed rate, here are a few tips to get the most out of this relatively unpopular short-term product:
Finding the best current 2-year fixed mortgage rate in Canada starts with comparison shopping. RATESDOTCA is your one-stop shop that allows you to compare the best rates in the easiest way possible. All major banks, credit unions and mortgage brokers are at your fingertips and ready to help once you’ve decided who you want to work with.
Much like any other mortgage term, you will need to renegotiate or find new financing terms for a new mortgage. You may choose another 2-year fixed mortgage rate should that satisfy your short-term lending needs, or if you’ve decided to commit for longer term, you may choose a longer-term mortgage rate. It all depends on your needs, and the cost of borrowing, at the end of your 2-year term.
A mortgage refinance can be done at any time, not just at the end of your term. You can take out money to be used for things such as debt consolidation. While you will be charged penalties for refinancing before your term is up, you can still refinance at the end of your term. Keep in mind that over a 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 give prospective homeowners the ability to get the best mortgage rate available, in the event that interest rates increase.
Joel Kranc is a freelance writer and content provider who has worked with RATESDOTCA since 2019. He holds an MA in political science from the University of Toronto and a film certificate from New York University.
He has been published in and worked for such companies as CNN, Rogers Media, Institutional Investor Magazine, The Globe and Mail, Infrastructure Investor, BenefitsPRO Magazine, Global Finance Magazine, With Intelligence, the CPP Investment Board, Hospitals of Ontario Pension Plan, and many more financial services and industry publications.
He is the author of "Retirement Planning in 8 Easy Steps," which, when released in 2015, was No. 11 on the Publisher's Weekly US Bestseller List for Business and Finance, beating out Mark Cuban's "How to Win at the Sport of Business."
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