Welcome to Mortgage Rundown, a quick look at what’s happening in Canada’s mortgage rate landscape from a mortgage strategist Robert mclister.
Where are these higher rates?
Fixed mortgage rates were now supposed to be higher. The popular rhetoric was that a recovery-driven recovery would increase bond yields and mortgage costs by this fall. If you’re wondering why this hasn’t happened yet, blame it on the wave – the fourth wave of COVID.
But there’s a good chance the higher rates won’t derail, they’ll just be delayed. Average core inflation expectations are influencing interest rates, and average core inflation has just climbed – again. The latest data shows it is up to 2.57% thanks to the biggest supply disruption in decades. Economists say it is near a high, but if it exceeds 2.73% it will be a 30-year high.
It’s not inflation we need to worry about today, however. It’s inflation in a year or two that will determine what you have to pay to borrow. Indeed, bond yields – a leading indicator of mortgage rates – anticipate price increases. Yields always jump ahead if inflation looks threatening.
Here’s what that means in English: If you’re hoping today’s mortgage rates don’t rise further, you’re hoping Canada’s five-year bond yield will stay below its peak of 1.07% in March.
But we also have to be real. As the recovery takes hold, rates should eventually rise, despite the Bank of Canada’s mantra that above target inflation is “transient.”
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Mortgage rates are falling
As Canada waits for a sustained recovery that never seems to happen, banks are getting slightly more generous with their mortgage rates. The lowest five-year discretionary fixed rates have fallen 0.05 percentage points in recent weeks, to 2.09% or less.
“Discretionary Rates” are unannounced bank rates available to qualified borrowers, usually after some negotiation.
In contrast, the lowest discretionary variable rates are around 1.29%, which is the prime rate minus 1.16%.
That initial 0.8 percentage point saving over five-year fixed rates is terribly tempting, especially if you believe that rising prices and rates will weigh on over-indebted consumers and slow the economy. If that happens, the variable rate hike could be limited to four or five rate hikes, which is exactly what the bond market is predicting for the next three years.
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In the attached table, insured rates apply to those who buy with less than 20% down payment or to those who transfer a pre-existing insured mortgage to a new lender. Uninsured mortgage rates apply to all other owner-occupied finance for qualified borrowers.
Fix or float?
If the above scenario comes true and Canada’s overnight rate peaks at around 1.5%, the math is clear. Variable mortgages are the winners based on rate simulations. According to Bloomberg data, they will earn based on the projected interest costs over five years and they will earn penalties. Variable rate prepayment penalties are generally less expensive than fixed term penalties.
But assumptions rarely go as planned. Much could change before the second half of next year, when the Bank of Canada plans its first rate hike. Take the example of the inflation expectations of Canadian businesses. Currently, these expectations are the highest on record. If they get worse, the risk of rate hikes increases, especially if we get: a) disproportionate wage inflation, and / or b) “demand-driven” inflation from higher consumer spending .
If this worries you, and it probably should if you’re less financially resilient, then five-year fixed rates of 1.99% or less are still a historic good deal, especially if you choose a fair penalty lender.
New switching option
Bank of Nova Scotia is killing big bank competitors with its “eHOME” online mortgage. It has the easiest app, free valuations, and the best bank rates I’ve seen on the web.
Note: You need to log in to purchase its tariffs, but no credit check is required, unlike other intrusive banking apps.
Now, after two years, Scotiabank has opened eHOME to people transferring a mortgage from another lender. And as of this writing, its uninsured conversion rate is 1.99% for uninsured five-year fixed rate mortgages, plus $ 500 cash back for the conversion fee. By comparison, the lowest five-year fixed rate reported by other major banks is 2.34%.
To switch to Scotiabank using eHOME, you must be creditworthy, have at least 20% equity (i.e. a loan-to-value ratio of 80% or less) and l he mortgage must relate to a house occupied by its owner. Unlike most banks, you can do it all online. The only in-person visit is when you sign the closing documents. If you need help, you can call or text your dedicated mortgage advisor, who isn’t paid on a commission like most mortgage specialists.
However, eHOME is not for everyone. On the one hand, you can only get an incidental mortgage, which some don’t like due to the additional transfer fees at maturity. (An incidental mortgage allows you to re-borrow without having to hire a lawyer to re-register the mortgage.) Second, the big banks – including Scotiabank – have potentially worse interest rate differential penalties than others. lenders. This is a serious factor if you go for a fixed solution and then cancel the mortgage early.