Market Rate Forecast: No BoC hikes until at least 2023
BoC’s Headline Quote: “…The Bank is prepared to provide further monetary stimulus as needed.”
BoC on the Economy: “The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.”
“We are being unusually clear…,” said Governor Tiff Macklem. “If you’ve got a mortgage…you can be confident that interest rates will be low for a long time.”
The BoC promised to provide monetary stimulus for “an extended period.” Based on its new forecasts, that means until at least 2023.
A second widespread lockdown (which the Bank is not expecting) would have “serious economic consequences” and extend the low-rate outlook.
The Bank sees the most serious pandemic impacts fizzling out by roughly mid-2022.
How to Play It
If the BoC’s forecast pans out, the next few years entail little risk of significant increases to bond yields (relevant for fixed mortgage rates) and the overnight rate (relevant for variable mortgage rates). On a related note, the all-important 5-year yield fell slightly this morning, following the Bank’s announcement.
If you don’t believe Governor Macklem’s tea leaves, and you’re still concerned that inflation and rates could surge before the next three years, you’ll be happy to know 5-year fixed rates are now:
approaching 2% for uninsured mortgages …at competitive lenders, that is. Sadly, many lenders either don’t have low enough funding costs or prefer targeting less price-sensitive borrowers who they think don’t comparison shop as aggressively. Fortunately, that doesn’t include you!
For would-be floaters in the crowd, unless you’re able to find a variable rate at least a half-point under the best 5-year fixed rates from fair-penalty lenders, the risk-reward of floating your rate isn’t overly attractive. Barring that sort of discount, if the BoC were to hike rates 100 bps in 2023, for example, you’d pay less in a 5-year fixed — assuming you didn’t break the mortgage early.
If you’re a real inflation hawk, you’ll find even longer terms, like 7-year fixed rates, now as low as 2.14% (a new record, as of yesterday). As a bonus, you can get these “lucky-7” mortgages from fair-penalty lenders. Just be warned, if you choose a lender with less favourable penalties and need to break the mortgage early, seven-year terms can have brutal IRD penalties and are anything but lucky.
The lowest rates are currently on 1-year fixed terms. In some provinces they’re now as cheap as 1.59% for insured mortgages or people with 35%+ equity. If you have a decent size mortgage, don’t mind renewing in a year, want maximum refinance flexibility and the lowest possible borrowing costs, one-year terms will do you right. That’s particularly true in a flat-for-long, COVID-depressed rate environment.
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We’ve been offered a five-year variable at p-0.75, uninsured. These days, that’s pretty good, I think. It’s not too late to change our minds and go fixed at just under 2%, but we’re good variable candidates and like the flexibility if we have to sell or want to lock in later. Keeping in mind it’s only a projection, knowing that rates may stay very low into 2023 makes me feel a bit more confident about going variable!
Is there a risk/disadvantage of renewing a mortgage with one of those fair-penalty lenders compared to the big 6 banks given the current attractive rates?
Hi Tom, The thing with renewals is that it’s largely hit or miss — depending mostly on the lender’s cost of funds, profit margin requirements and appetite for volume at the time. With banks like HSBC it’s easier because you know you’re going to get a rate that’s at least as good as their website rates. Most lenders don’t advertise leading everyday low rates like HSBC. So you have to rely on your lender’s renewal/retention departments quote (and/or your broker if you used a broker). Either way, if a lender is competitive enough at origination they’ll probably be competitive at renewal. Whoever the lender is, you always have to negotiate regardless. No one should ever take a lender’s first offer at face value.
I appreciate your comments on
July 15, 2020 at 03:13 PM. I’m monitoring rates and hope to refinance at a more attractive and lower level when the marginal benefits make it meaningful enough.
Hi Spy, our primary residence mortgage is paid off but we have a small HELOC @ 3% that we’re half-using. It was sized roughly 10yrs ago as some % of home value. Given future risks, it would be nice to get “access” to 80% of the CURRENT home value with an expanded HELOC. Looks like it will take BOTH a small (15% of value) mortgage and a large HELOC to truly get access to 80% as HELOCs are capped at 65%? Non-bank lenders have better mortgage rates but might not do HELOCs. Bank lenders won’t do HELOCs if they don’t have the primary mortgage. Tangerine has best HELOC rate but not the best mortgage rate. Any recommendations for mixing lenders in this scenario?
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Hi Spy,
Would you expect the banks’ posted rates will drop anytime soon given the low-interest rate environment in the next few years?
Hey Andrew, There’s a higher probability of the next change in the Bank of Canada’s benchmark 5yr posted rate being a drop, than an increase. Scotia lowered its 5yr posted to 4.79% last Friday: https://www.ratespy.com/best-bank-mortgage-rates
We’ve been offered a five-year variable at p-0.75, uninsured. These days, that’s pretty good, I think. It’s not too late to change our minds and go fixed at just under 2%, but we’re good variable candidates and like the flexibility if we have to sell or want to lock in later. Keeping in mind it’s only a projection, knowing that rates may stay very low into 2023 makes me feel a bit more confident about going variable!
Hey Chris, That’s solid. Who’s the lender?
Hi Spy,
Is there a risk/disadvantage of renewing a mortgage with one of those fair-penalty lenders compared to the big 6 banks given the current attractive rates?
Thanks..
Hi Tom, The thing with renewals is that it’s largely hit or miss — depending mostly on the lender’s cost of funds, profit margin requirements and appetite for volume at the time. With banks like HSBC it’s easier because you know you’re going to get a rate that’s at least as good as their website rates. Most lenders don’t advertise leading everyday low rates like HSBC. So you have to rely on your lender’s renewal/retention departments quote (and/or your broker if you used a broker). Either way, if a lender is competitive enough at origination they’ll probably be competitive at renewal. Whoever the lender is, you always have to negotiate regardless. No one should ever take a lender’s first offer at face value.
I appreciate your comments on
July 15, 2020 at 03:13 PM. I’m monitoring rates and hope to refinance at a more attractive and lower level when the marginal benefits make it meaningful enough.
Hi Spy, our primary residence mortgage is paid off but we have a small HELOC @ 3% that we’re half-using. It was sized roughly 10yrs ago as some % of home value. Given future risks, it would be nice to get “access” to 80% of the CURRENT home value with an expanded HELOC. Looks like it will take BOTH a small (15% of value) mortgage and a large HELOC to truly get access to 80% as HELOCs are capped at 65%? Non-bank lenders have better mortgage rates but might not do HELOCs. Bank lenders won’t do HELOCs if they don’t have the primary mortgage. Tangerine has best HELOC rate but not the best mortgage rate. Any recommendations for mixing lenders in this scenario?
What are the chances bond rates go up before two years?