Watch Those Swaps

  • It’s not getting any cheaper for banks to fund a fixed-rate mortgage. In fact, Canada’s 5-year swap rate, a common measure of 5-year funding costs at the big banks, is running at a 10-month high.
  • Yet, still we’re seeing lenders trim 5-year fixed rates as the cut-throat spring market approaches. RBC chopped its 5-year fixed by 18 bps last week. And on Wednesday, CIBC trimmed its advertised uninsured 5-year fixed to 1.99%, tying TD for the lowest of the major banks.
  • How much longer banks are willing to accept shrinking spreads (profit margins) is anyone’s guess. They still have billions in government-backed liquidity that they have to put to work, and mortgages are a nice, safe asset class. Moreover, “We are basically in a recession,” CIBC economist Ben Tal told the Post on Tuesday. Given that, and relentless competition, banks can barely afford to raise their asking prices on mortgages.
  • Meanwhile, 5-year forward rates are now over one percentage point above 5-year bond yields. That’s the biggest gap since May 2017, and confirmation that rates are likely headed higher, so thinks the market.
  • All that is to say, while this may not be the last hurrah for 5-year fixed rates, there are fewer and fewer hurrahs left.

This & That

  • CIBC dropped its 5-year variable rate by 19 bps on Wednesday to 1.69%, the lowest advertised floating rate of any Big 6 bank. The move follows a similar 15-bps RBC cut last week. Expect banks to push variable rates hard, right before 5-year fixed rates lift off.
  • Here’s the latest mortgage rate outlook for February.
  • Big banks opine on rising rates (RATESDOTCA story)
  • Quotes of note from CIBC economist Ben Tal (via Financial Post)
    • “This is the first recession ever that the housing market didn’t go down. Why? Of course, low interest rates.”
    • “I do believe the spring and summer [housing market] will be extremely strong.”
    • “The speed at which people are fleeing the cities is unsustainable.”



6 Comments

  • Neil says:

    Hi Rob (Spy),

    Given movement in 5 yrs (~ 49bps) from your last post and now 5 yr swap spreads here, what would you recommend for someone whose 5 yr fixed mortgage (2.59%) is up for renewal at the start of april, *but* will be moving in the summer at some point?

    – Renew with a 5 yr, no prepayment penalty paid now, and negotiate in portability? (could be an issue as our current mortgage is insured and we may potentially need > $1MM / uninsured). Even without portability the prepayment charge on a 5 yr fixed even broken early wouldn’t be much with rates where they’re trending (up), correct?

    – Fully open HELOC (which would mean paying a prepayment penalty now), layering in a 90 / 120d preapproval on a 5 yr fixed to hopefully cover the next purchase?

    – Go 1 yr fixed?

    The idea of course is to get a good all in borrowing cost (i.e. avoid unnecessary prepayment charges)

    Many thanks!!

    • The Spy says:

      Hi Neil, It’s unlikely that a borrower would get a great deal negotiating an uninsured port and increase rate, after just locking into a new 5-year insured term. The existing lender has too much leverage and (if a non-bank lender) much less favourable funding costs on uninsured money.

      For someone needing financing for just 3-4 months, the better play would be getting the cheapest possible open term with the lowest possible rate and fees. Then get a good rate hold 90- to 120-days before moving day.

  • David says:

    Good afternoon, my 5 year BMO fixed mortgage term is up July 1st 2021. I noticed I can secure a 10-year fixed rate with Tangerine on their website (an eye popping 2.14% this would be my last as I only have 10 years left on my mortgage) however if I secure now it only secures until Jun 11th.

    Should I secure the 10-year 2.14% fixed rate now and worst case scenario on Jun 10th break my BMO mortgage with 3 weeks left or hope nothing changes until March 1st and lock in the rate with Tangerine at that point?

    Thoughts?

    • The Spy says:

      Hi David, BMO should charge you just the remaining interest when breaking with three weeks to maturity (definitely call BMO to confirm that).

      Then get a 120-day rate hold from Tangerine. Ask Tangerine to reset the rate hold once you’re 120 days from renewal if the 2.14% is still available then — in which case you can switch lenders at maturity with no penalty.

  • Kristy says:

    Hi David,
    I have a CIBC 5 year fixed at 3.44% 25 yr amort due Oct 2023.
    The penalty is large 11,593. They are offering $2500 off the penalty and 1.79% for 5 yr fixed 20 amort.
    Not sure what to do? I have it on hold for 2 weeks.
    Wait to see about rates?

  • Kristy says:

    Hi David
    To add to above. I could go to another institution for a rate of 1.69 for 5 yrs fixed.
    What to do?

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