Mortgage depletion: Some loan rates do fall. But for how long?
Welcome to Mortgage Rundown, a quick look at what is happening in the Canadian mortgage rate landscape from a mortgage strategist Robert McLister.
Where are the higher rates?
Fixed mortgage rates were now to be higher. The popular narrative was about a recovery from a boom that would boost bond yields and mortgage costs by the fall. If you’re wondering why it didn’t, blame it on wave – the fourth wave of COVID.
But chances are the higher stakes aren’t derailed, they’re just delayed. Expectations for average core inflation affect interest rates, and average core inflation has just risen – again. The latest figures show it has risen to 2.57 percent thanks to the worst supply disruption in decades. Economists say it is close to the top, but if it goes above 2.73 percent, it will be the highest level in 30 years.
However, we don’t have to worry about inflation today. It is inflation a year or two from now that determines how much you pay for a loan. In fact, bond yield – the leading mortgage rate – predicts price increases. Yields always jump earlier if inflation appears to be threatening.
Here’s what it means in English: If you are hoping that today’s mortgage rates will not increase further, you are hoping that Canada’s five-year bond yield will stay below March’s 1.07 percent high.
But we also have to be real. As the recovery continues, interest rates should eventually rise – despite the Bank of Canada mantra that inflation above the target is “temporary”.
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Lower mortgage rates creep
As Canada expects a sustained recovery that never seems to come, banks are becoming a bit more generous in pricing their mortgage loans. The lowest discretionary five-year fixed rates have fallen by 0.05 percentage points in recent weeks to 2.09 percent or less.
“Discretionary rates” are unannounced bank rates available to eligible borrowers, usually after some negotiation.
On the other hand, the lowest discretionary variable rates are around 1.29%, i.e. the prime rate minus 1.16%.
Saving 0.8 percentage points upfront compared to the fixed five-year interest rates is terribly tempting, especially if you think rising prices and rising rates will burden over-leveraged consumers and slow down the economy. If that happens, the rise in floating rates may be limited to four or five rate hikes, which is exactly what the bond market is pricing in over the next three years.
Lowest mortgage rates announced in the country
In the attached table, the insurance rates apply to people who buy with less than a 20% advance or change their previously insured mortgage to a new lender. Uninsured mortgage rates apply to all other types of owner-occupied financing for well-qualified borrowers.
Repair or swim?
If the above scenario materializes and Canada’s overnight rate peaks around 1.5 percent, the math is clear. Based on the simulated interest rates, variable-rate mortgage loans win. According to Bloomberg, they will win based on projected five-year interest costs and will win on penalties. Floating-rate penalties are typically cheaper than fixed-term penalties.
But hypotheses rarely develop as predicted. Much may change before the second half of next year, when the Bank of Canada announces the first rate hike. Take, for example, the inflation expectations of Canadian companies. These expectations are now at their highest ever. If they get worse, the risk of a rate hike increases, especially if we receive: a) excessive wage inflation and / or b) “demand driven” inflation due to rising consumer spending.
If any of these things bother you, and probably should, if you’re less financially resilient, then a five-year fixed rate of 1.99 percent or less is still a historic deal, especially if you choose a lender that doesn’t pay fairly.
New toggle option
The Bank of Nova Scotia is killing big banking competitors with its “eHOME” online mortgage. It has the easiest app, free quotes, and the best rates from big banks I’ve seen on the internet.
Note: You’ll need to sign in to buy rates, but no credit check is required, unlike other intrusive banking apps.
Now, two years later, Scotiabank has opened eHOME for people changing their mortgage from another lender. And as of this writing, his uninsured swap rate is 1.99 percent on five-year fixed-value uninsured mortgages, plus a $ 500 cashback on swap costs. By comparison, the lowest five-year fixed rate advertised by the other Big Six banks is 2.34 percent.
To enter Scotiabank with eHOME, you must be creditworthy, have at least 20 percent of your equity (ie 80 percent of your loan-to-value or less), and the mortgage must be on the owner-occupied home. Unlike most banks, you can do anything online. The only personal visit takes place when signing the closing documents. If you need help, you can call or message a dedicated mortgage advisor who pays no commission – unlike most mortgage specialists.
However, eHOME is not for everyone. First, you can only get a secured mortgage, which some people don’t like because of the extra cost of conversion at maturity. (A secured mortgage allows you to borrow again without having to consult a solicitor to re-register the mortgage.) Second, large banks – including Scotiabank – have potentially worse differential interest penalties than other lenders. This is a serious factor if you get repaired and then break your mortgage early.