So Long, Cheap One-Year Fixed Rates

Short-term rates are taking off.

TD Canada Trust, one of the last big banks with cheap short-term rates, is a case in point.

TD had the lowest one-year rates of any big lender for months. Today, it boosted its posted one-year rate by 30 basis points (that’s a lot in one increase), to 3.34%.

The move comes as short-maturity government yields, which guide 1- and 2-year mortgage rates, hit highs we haven’t seen since the Great Recession in 2008.

That’s in keeping with derivatives prices in the bond market, which imply there’s a better than 4-in-5 chance the Bank of Canada will hike rates again at its October 24th meeting. Bank of Canada monetary policy has a strong effect on short-term rates.

So Long, One-Year Deals

For months, the best one-year fixed rates have been lower than the average variable rate. That’s given borrowers a low-cost flexible option if they’re considering exiting their mortgage in about 12 month’s time.

By comparison, you’ll find deep-discounted variable rates at 2.40% to 2.75%, including those “effective rate” offers with cash rebates. That’s taken some lustre off one-year rates which, as of today, are pushing 2.89% to 3.14%.

Still the Best Short-term Strategy

If you’re thinking about paying out your mortgage next fall, a one-year fixed under 3.00% is the right play.

A single-year term under 3.00% also makes sense if you’re looking for a variable-rate alternative that partially insulates you from rate hikes for the next 12-24 months. If the Bank of Canada does lift rates again next month, or in December, that would take prime rate to 3.95%, the highest it’s been since November 2008. A one-year rate would be unaffected until it’s renewed.

But if you’ll have the mortgage for at least five years and don’t want to renew every 12 months, an ultra-low variable rate may be the ticket. That could be true even if you have to pay a penalty to get out early. Most variable-rate mortgages have just a three-month interest charge if you exit the mortgage before maturity. Variables also let you more quickly participate in rate cuts, should the BoC reverse course to stave off a recession in 2020 or 2021.

Spy Tip: If there’s a chance you’ll break your variable early, be sure to pick a lender that bases its three-month interest penalty on the “contract rate” (the rate you actually pay). Reason being, many low-frills variable rates entail penalties that are 2.75% or 3.00% of your principal, which is much more expensive. Moreover, some lenders base the penalty on prime rate instead of the contract rate—which again is more expensive than the standard prepayment charge.

One last consideration when it comes to one-year terms. If you’re switching lenders, note that lenders often don’t pay your legal and appraisal fees when you switch into a one-year term. By contrast, most lenders do cover these fees when you choose a 3-year term or longer. Those costs can total $1,000+ in some cases, making a one-year term unappealing to those with smaller mortgages.