Lenders are not done sacrificing profit for market share. On Thursday, we hit yet another all-time low for 5-year fixed mortgage rates: 1.25%. That’s for default-insured mortgages only (like virtually all the lowest 5-year fixed rates).
Insured or not, it’s a staggeringly low price for 5-year money. At 1.25%, this offer is just 31 basis points above the 5-year swap rate (a rough ballpark for what it costs to fund a 5-year fixed mortgage). The fact that spreads have shrunk to just 31 bps may not mean much to the average borrower, but these are Canada’s most aggressive 5-year rates since October 2018.
Fun fact: A new mortgage at 1.25% means a whopping 73% of your payment is used to pay down principal. In September 1981, rates hit 21.4%. At that rate, 99% of the first year’s payments would have gone towards interest!
And it’s not just one provider on a discounting spree. Dozens of lenders have trimmed their fixed pricing in the last few weeks. It’s an apparent play for market share ahead of the all-important spring mortgage market.
Note: This 1.25% is a bought-down contract rate from a very small number of brokers. The product is low-frills, applicable to purchase financing only and is most suited to someone who’s extremely unlikely to move or require additional funds in the next five years. It’s available in Alberta, B.C., and Ontario.
The new lows this week present a crossroads for mortgage shoppers. Clearly the rate market is anticipating that future inflation will exceed the Bank of Canada’s 2% mid-point target. And knowing that above-target inflation usually leads to higher bond yields and higher fixed mortgage rates, a rate like 1.25% begs the question, how much lower can we really go?
The answer is that bond yields can theoretically go negative—if the economy got bad enough. That would drag mortgage rates down for the ride. But “can” and “will” are two different things. Economists believe that the greater the percentage of vaccinated Canadians, the greater the probability that rates creep higher. Mortgage shoppers who buy into that argument must ask themselves, how much longer do I want to gamble on falling rates? Our answer would be, not much longer.
Quotable
“The money supply growth we’ve seen is unprecedented in normal, moderate inflation times, and isn’t consistent with a 2% inflation target…” — CIBC report.
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If bond yields stay in the range they are, would you say there is no further room for rates to go down? I’m assuming, the only thing that could drive rates lower (again, assuming the Canada 5 year bond yield stays in the range it is currently in), would be further reduction in the 5 year swap spread (i.e. the amount lenders are making)?
Hi spy, I am currently 6 months into a 5 year p-0.85 variable mortgage at 1.6%. Would you recommend locking in to a fixed rate at this point? The mortgage is convertible.
Hi Daniel, Going from variable to fixed depends on things like:
* The fixed rate you can get
* Your ability (mentally and financially) to handle higher payments or interest cost
* Your 5-year plan (e.g., will you need to refinance, sell/move, etc.?)
* Your lender’s refinance and porting policy
* The lender’s penalty formula (other things equal, a punitive interest rate differential policy would make a fixed rate less appealing)
Hi Ismail, There’s currently just one non-bank broker-channel lender supporting this rate. We won’t mention them here because it’s a bought down rate and lenders don’t like us promoting those rates since not all brokers get them. You can find the brokers offering 1.25% on this website. Then simply ask them who the lender is.
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If bond yields stay in the range they are, would you say there is no further room for rates to go down? I’m assuming, the only thing that could drive rates lower (again, assuming the Canada 5 year bond yield stays in the range it is currently in), would be further reduction in the 5 year swap spread (i.e. the amount lenders are making)?
The clock is ticking on these low rates. Once the JNJ vaccine is out I wouldn’t be surprised to see yields move higher.
Hi Akash,
Good question.
Assuming a well-qualified borrower, two main things determine the mortgage rate he/she pays:
1) What it costs the lender to fund the mortgage
2) The lender’s desired profit on the mortgage
The bond yield, swap rate, Canada Mortgage Bond yield, etc. are all rough measures of base funding cost, and they speak to point #1.
But there’s still room for lenders to trim #2.
So yes, 5-year fixed rates could still edge down a bit even if funding costs go sideways.
Hi spy, I am currently 6 months into a 5 year p-0.85 variable mortgage at 1.6%. Would you recommend locking in to a fixed rate at this point? The mortgage is convertible.
Hi Daniel, Going from variable to fixed depends on things like:
* The fixed rate you can get
* Your ability (mentally and financially) to handle higher payments or interest cost
* Your 5-year plan (e.g., will you need to refinance, sell/move, etc.?)
* Your lender’s refinance and porting policy
* The lender’s penalty formula (other things equal, a punitive interest rate differential policy would make a fixed rate less appealing)
Here’s more reading material: https://www.ratespy.com/fixed-or-variable-rate-the-decision-checklist-02223752
Hi Ratespy
Which institutions are offering 1.25% for 5 yrs
My broker says that the best he can offer is 1:39
With under 20% down
Hi Ismail, There’s currently just one non-bank broker-channel lender supporting this rate. We won’t mention them here because it’s a bought down rate and lenders don’t like us promoting those rates since not all brokers get them. You can find the brokers offering 1.25% on this website. Then simply ask them who the lender is.