log in
This week, the lowest 5-year fixed rates dropped back to 2017 levels. It only took a year and a half.
Canada’s cheapest 5-year fixed mortgage is now 2.67% for default-insured applicants, the lowest since December 20, 2017. And fixed rates could keep dipping near-term.
What’s Behind It
With global growth worries weighing on the market, 5-year bond yields can’t get any lift. They’re now threatening to dip into the 1.40%-range. (Bond yields generally guide fixed mortgage rates.)
The market has had a lot on its mind: the trade war, falling oil prices, stocks keeling over and so on. All these worries are hurting sentiment and making investors snap up “safe” government bonds. Generally speaking, greater bond demand = lower yields = lower mortgage rates.
What’s most interesting is that yields can’t gain any altitude even with record job gains and a four-decade low in unemployment. When the market moves opposite to what solid headline fundamentals suggest, there’s usually much more to the story. And that hidden risk is what the bond market is worried about.
Term Check
All the most competitive lenders now offer 5-year fixed rates south of 3%. If your lender doesn’t, and you’re an AAA borrower (i.e., you have great credit, sufficient provable income, a straightforward application, etc.) you’re probably overpaying.
Another sweet spot in the market remains the 3-year fixed. Despite a 5-year having only slightly higher rates, a 3-year term gives you:
- more flexibility to refinance earlier, at best rates and without penalty
- lower potential penalties if you are forced to break the mortgage early
- an opportunity to lower interest costs in 36 months (if the economy slows down as many expect).
The best advertised 3-year rate through lenders is 2.94% via Tangerine, with TD close behind at 2.96%. Brokers are even lower, however—as low as 2.65% for default-insured purchases.
Variable Rates: The Black Sheep
Current demand is overwhelmingly tilted towards fixed rates. You almost can’t give variable rates away at today’s prices.
Most floating rates are simply not priced low enough—relative to 5-year fixed rates—to spark interest. In fact, many variable rates are above long-term fixed rates. And that’s just the market we’re in. The majority of investors think rates are sideways-bound to headed lower, and this is the kind of perverse rate action you see in such cases.
Ultimately, VRM borrowers may be vindicated if the next move in prime is down. But only a brave few are willing to go contrarian and take that gamble.
5 Comments
So, with rates having largely returned to historical lows, does that mean the brokers are OK with the stress test? What exact methodology do you have in mind for revising the stress test level (leaving your ongoing complaint about application at renewal and switches aside for the moment). Should stress tests be reduced, and if so, by precisely how much and why? Please show your homework.
David, I’d be far more comfortable with a stress test based on the 5-year bond yield + 350 bps than the current scheme (benchmarked weekly to reduce volatility).
It takes the distortion of bank posted rates out of the equation and lets the stress test adjust more quickly to market expectations of future rates.
The 350 bps increment makes it roughly equal to the average five-year fixed rate plus 200 bps (similar to today).
Feel free to email me for more “homework.”
Apparently David doesn’t realize the stress test is based on 5-year posted rates, which banks haven’t lowered since 2016.
Market is definitely opening up the spread between the five year bond (now sub 1.4%) and the best five year rates.
If it holds sub 1.4%, do you think the 5 year fixed could drop further, or have we bottomed out?
Hey Ray, We’re still far from the ultimate bottom long-term. One of the two next rate cut cycles should get 5-year yields near zero. So add 150 bps on top of that and there’s your potential 5-year fixed rate (someday). Mind you, we may not see this for years. It’s impossible to time.