Rate Surveillance: Fixed Rates Improve

Don’t pop the Dom Pérignon just yet, but rates on Canada’s most popular term—the 5-year fixed—have dropped in the last two weeks. And it’s high time they did. Government bond yields have trended below their three-month average since December.

(Bond yields and mortgage rates have a cozy relationship since lenders commonly price fixed mortgages against bond rates.)

As usual, the Spy’s crack intelligence team brings you the lowest rates in the country, and this week is no different. While major banks are quoting 2.74% or more behind closed doors, RateSpy.com now lists five-year money as low as 2.28%. That’s just a hair (3 basis points) above the all-time low.

Keep in mind, however, the lowest rates almost always have restrictions. Typically that means the mortgage must be insured, must close within 30-45 days, has higher penalties and/or has refinance restrictions.

If you want a full-featured 5-year fixed with a 120-day rate hold, be prepared to pay a 15- to 20-basis-point premium. And if you need a pre-approval (i.e., you’re shopping for a new home and don’t have a set closing date), add another 10-20 basis points.

Variable Rates: Bad But Holding

Scotiabank recently became the first bank in many moons to post a variable rate above prime rate. If nothing else, that’s symbolic of just how much variable rates suck right now (a few prime – 0.60%+ broker rates notwithstanding).

Since the last Bank of Canada rate cut in July, prime rate has gone nowhere. Yet, the price of getting a new variable-rate mortgage has surged. As recently as November, for example, there were still banks widely advertising prime – 0.50%. Today you’d be lucky to snag prime – 0.25% at any of the Big 6 lenders.

The near-term outlook is for little, if any, improvement in variable-rate discounts. Lenders are paying more to sell variable-rate loans to investors, and (says TD Economics) higher rates are “partly reflecting a squeeze on bank funding costs amid tighter financial conditions and changes to regulatory rules.”

Fortunately, short-term rates and risk premia (the extra yield investors charge to invest in mortgages, relative to “safe” bonds) have dipped a bit. That’s taken some of the pressure off floating-rate funding costs. As a result, variable rates have slowed their ascent.

That still doesn’t mean you should get one. If you’re well qualified and shopping for a cheap rate, you’ll find better value in 1-, 2- or 3-year fixeds.

Deficits & Rates

Our trusty Finance Minister Bill Morneau was a “tad” off on his deficit forecast, about $14.5 billion off, that is. The implication is that Canada could issue more debt and spend more to revive the economy. That’s normally bearish for bond prices, and hence bullish for bond yields. (As bond prices go down, yields go up.)

This matters because if yields stay higher than they otherwise would be, fixed mortgage rates also stay higher.

That said, other factors like U.S. government yields and oil prices should have more impact on mortgage rates in 2016 than medium-term deficit projections. As it stands, financial traders are still betting on a Bank of Canada rate cut by year-end. Thereafter, TD Economics projects the Bank of Canada will “hold pat until at least 2018.” When it comes to accuracy, that prediction is probably as good as your grandmother’s, but it’s nonetheless notable that TD—and many economics powerhouses for that matter—have seemingly given up on forecasting rate hikes. Must be a bottom in rates, eh? (Kidding)