Red Alert on Fixed Rates

Borrowers have been blessed with mortgage rates that look like promotional savings rates: 1.99%, 2.25% and the like. But now, sadly, those rate bargains are in jeopardy, at least for a while.

The tide of bond yields is rising, and when that happens, so go fixed mortgage rates. Five-year fixed rates below 2.34% may be on the endangered species list, as early as mid-next week — unless yields reverse course pronto.

Government 5-year bond yields drive the bus when it comes to fixed rates, and we’ve seen a 123% increase (49 basis points) in just two short months.

Chart Source: MarketWatch.com

Yields are following oil higher, which has zoomed 67% in a similar timeframe. On top of that, Canadian economic data (retail sales, GDP, inflation, etc.) is looking surprisingly robust. That’s unsettling news to bond investors, who are selling bonds and pushing yields even higher (prices and yields move inversely).

All of this has jacked up the odds of fixed-rate hikes. We’re now well above the 52-week midpoint for yields, so 5-year fixed rates have no business at record lows (as they are only on RateSpy.com).

So far we’ve seen just three lenders hike fixed rates, but more increases may be lurking next week. God only knows where rates will head in May, but a 5-15 bps bump up is easily possible by the end of April.

Quick Tip: Every 10 bps of rate adds another $470 of interest on a $100,000 mortgage, assuming a 5-year term and 25-year amortization.

None of this should hurt variable mortgage rates by the way. We’ve actually seen some lenders improve variable discounts — by roughly 5 bps — over the past 2 weeks.

Spring Buzz-Kill

What an anticlimactic spring it’s been for rate sales. Sure, The Spy lists a few fixed rates at all-time lows, but where’s the big splashy lender rate sales of springs gone by? Where’s the frenzy of a 2.99% BMO campaign like in 2012, or an Investors Group Prime – 1.01% sale in 2014, or even CIBC’s 1.99% promo from last summer?

Those days are gone. This spring, lenders don’t want to give it away. And it’s hard to blame them from a purely business perspective. They face new securitization costs (which take effect this July), more capital costs on the horizon and ruthless competition for deposits, all of which make mortgages more expensive to fund.

On top of that, no bank wants policy-makers thinking they’re inciting more borrowing when Tor-Van home prices are reviving memories of Tokyo, circa 1990. Nope. Those big juicy Big 6 Bank rate sales are on ice…for now.